By all accounts, Wall Street is in the midst of a massive shift. Amid global market uncertainty, onerous regulations and a cautious investment climate on the heels of the Trump election, a new technological innovation is rapid emerging.
Known as blockchain technology, this distributed ledger advancement promises to create a leaner, more efficient and more profitable financial services world. This technology, which undergirds Bitcoin and many other forms of digital currency, is poised to create a new normal for how money is transacted. By providing a secure and transparent means of digitally tracking asset ownership, it could transform everything from how stock exchanges function to how stock proxies get voted on. Throughout the global stage, banks, investment networks and even governments are pouring money into the curation and testing of blockchains.
All of this comes on the heels of the highly anticipated decision by the U.S. Securities and Exchange Commission (SEC) on whether or not to approve the first ever bitcoin exchange-traded fund (ETF).
And just last month, the world’s largest banks moved forward with a major advancement on the blockchain though the Depository Trust and Clearing Corporation, which serves as the back end of most Wall Street trading. Here, one of the DTCC databases, the Trade Information Warehouse, will be re-platformed onto distributed ledger technology — a project led by IBM which has long been a champion of distributed technology. When fully functional, it is believed that this project will positively disrupt the capital markets industry, bringing a level of efficiency to the financial world that has never been witnessed before in post-trade processing. It is anticipated that this project will be ready for business in 2018.
The Building Blocks of Alliance
Ron Quaranta, chairman of the Wall Street Blockchain Alliance (WSBA), says that the organization he leads serves as a neutral, unbiased steward of education and cooperation between Wall Street firms, with a mission to guide and promote comprehensive adoption of blockchain and distributed ledger technologies across financial markets.
“We work to address the myriad of issues that have been and will continue to be part of blockchain adoption. As happens with any innovative technology, we are working with members across multiple fronts including education and training, implementation and integration, regulatory guidance and initiatives, strategic development and more. Our goal is to become the financial industry source for strategic advice, knowledge and resource[s] in a blockchain world.”
Quaranta notes that the WSBA was formed late in 2015, as he and several colleagues across banking, brokerage, law, trading and fintech realized that the rising interest in blockchain technology across global financial markets would require a nonprofit trade association to develop and guide this new technology going forward.
“There is [a] growing library of knowledge regarding blockchain technology, and we are certainly in a more knowledgeable position than we were in 2015,” says Quaranta. “That said, there is still a large majority of firms and personnel across financial markets that have little to no knowledge of blockchain [technology] or are struggling to understand it in the midst of overwhelming news and sometimes unclear information.”
Quaranta believes that the industry will continue to advance in small steps for a bit — a development that is “heartening” to see in terms of level of interest as well as the proliferation of viable use cases. In addition, he notes, major technology providers to financial markets have entered the arena — a development that will increase the velocity of adoption.
Existing Barriers to Adoption
There are a few barriers to widespread blockchain adoption on Wall Street at present that have garnered the most attention, according to Quaranta. One is the ongoing lack of expertise and resources needed for firms to review use cases and implement basic prototypes.
“While there are certainly large firms and innovative startups dedicating resources to this, many of which are frequently in the financial news media touting relevant and interesting projects, we are not yet at the point of broad-spectrum tool sets being available to wide portions of financial markets,” he says.
Quaranta also thinks that lack of awareness and understanding of blockchain technology at the executive levels is another hurdle that needs to be overcome.
“This needs to be done with an eye toward not just describing cost savings, but also what I call the ‘ROI of blockchain.’ We need to work as an industry to understand the best benefits of blockchain [technology], understand what use cases make sense, which do not make sense, and ultimately have a deep understanding of how financial markets do what they do, and what parts need to evolve for the future.”
Then there is the compliance factor. The industry is still weighed down by a lack of a cohesive regulatory framework around digital currencies and blockchain technology, with multiple federal and state agencies weighing in with proposed rules and oversight that make it difficult to develop a longer-term strategy.
Quaranta suggests that the tide is shifting, however, to where regulators are attempting to understand blockchain technology and digital currencies more, and trying to be a part of the innovation versus wanting to suppress it.
Looking toward the future, Quaranta believes that over the next 12 to 18 months we will see more and more “pilots” or moves into blockchain-based production systems. These, he says, will be incremental moves over time but will fuel a growing awareness of possible use cases for blockchain technology in multiple parts of financial markets, as well as in other industries.
“I believe we’re going to see a growing body of expertise in blockchain technology, and I would argue we will begin to envision ways that it can be used in conjunction with other technologies, such as VR/AR, artificial intelligence, machine learning and more. I also expect that we will see growing variety of types of financial instruments based upon cryptocurrencies, with availability worldwide — in fact, the dawn of which new asset classes based on blockchain [technology] and cryptocurrencies will be something I suspect we will see in the future, but time will tell.”