Talkin’ ‘Bout a Revolution – The Promise of Blockchain

Think about this. When I started commodity derivatives trading in the 80’s on Wall Street, I booked trades by writing up tickets.

Each commodity had a code (AU for Gold), and each futures contract had a symbol for the month (Q for August).  When I wanted to sell August Gold, I would take out a ticket, circle ‘S’ for sell, write AUQ and the volume, and then, get this, time stamp it, and throw it in a basket.  At the end of the day, I would go through the trades, rip off the top copy for my records, and take the carbon copies left, literally, to the ‘back of the office’ (back office), where, hopefully, they would be processed into the bank’s central system.  Seems absolutely antiquated I know, but yet, what if blockchain technology is about to make us feel that way about how we process trades today?  Is blockchain about to change the way we trade?

 

Past Payments

Where Bitcoin and other digital currencies had captivated the imaginations of audiences initially, we are now seeing a compelling shift of focus to Bitcoin’s more promising attribute – its underlying blockchain technology.  First we started to hear the buzz in the payments space.  Current payment systems used in the majority of the world are based on technology that is over forty years old, called Automated Clearing House or ACH. ACH technology batches transactions together and sends them out to be cleared in set intervals of time, which is why most bank transactions historically took 2- 4 days to go through. 

But times are changing, customers want more and regulators are demanding transparency and speed.  By integrating blockchain technology in modern day banking, transactions are now being cleared instantly, cheaply, and more securely.  When industry hitters like CIO of Swiss Bank, Oliver Bussmann, say, – “It is my personal prediction that blockchain technology will not only change the way we do payments, but it will change the whole trading and settlement topic.” – people start to listen.

 

Transforming Trading?

In theory, the decentralized system of blockchain for verifying information means transactions need no longer be channeled through banks, clearinghouses or other third parties.  This “trustless” structure means that direct transfers of ownership can occur, over the blockchain, almost instantaneously, without the risk of default or manipulation by an intermediating third party.  Imagine what this reduction in friction could mean for cost savings, improved processing and elimination of counter-party exposures. 

This new approach to the old concept of keeping ledgers, presents exciting potential in its ability to massively reduce the cost, and time, to clear and settle the exchange of financial assets.  But how will incumbent banks, exchanges and clearing houses respond to this transformational technology?  One thing’s for sure, the game just got more interesting.  It remains to be seen, if and how, traditional market facilitators will react.  Will present industry players be able to make blockchain their new BFF, or will they risk being shook up by new entry startups?