Blockchain has the potential to drive profound, positive change.
Blockchain is a distributed ledger, replicated across many nodes in a peer-to-peer network, thereby minimizing the need for oversight and governance of a single ledger. Each transaction is recorded and added to the previous one, which results in a growing chain of information.
The emergence of the cryptocurrency bitcoin and the blockchain platform have provided alternatives to traditional processes. Sensing the competitive threat, banks are investing capital and exploring setting up their own blockchain platforms. In a blockchain-based distributed ledger environment, clearing and settlement could occur within seconds. Perhaps more important, blockchain distributed ledgers could be optimized to clear and settle at different speeds depending on the market participant’s needs. Retail traders typically want to access money from a stock sale immediately, whereas market makers usually need a longer settlement time to net trading activity.
In addition to reducing settlement times, blockchain technology creates an opportunity for new products that optimize settlement for participants and price the service accordingly. Other benefits include lower collateral requirements and counterparty risk, improved contractual term performance, and greater transparency for regulatory reporting—not to mention better capital optimization as the need for risk capital is reduced. A recent Santander report estimates that blockchain technology could save the industry between $15-20 billion annually by 2022.
Other industries also see vast potential; utilities, for example, is trying to reinvent the energy grid with a peer-to-peer network to exchange energy assets and payments.