The interest in blockchain technology coming from the established financial community has been tremendous recently, with new global IT firms, major banks and worldwide exchanges announcing that they are trying to get in on the action every day now. However, it’s important to remember that no technology can possibly completely change entrenched business practices rapidly, especially in a highly regulated industry such as finance.
Larry Tabb is founder and CEO of TABB Group, a financial markets research and strategic advisory firm focused exclusively on capital markets. He helps senior business leaders and regulators better understand cutting edge financial markets issues, such as blockhain technology. TABB released today a report written by its CEO entitled “Blockchain Clearing and Settlement: Crossing the Chasm” – in which Tabb details the challenges still faced by the technology and estimates that it will take not only years but hundreds of millions, if not billions, of investment dollars for effective integration with the existing systems.
In the report, Tabb explains that the issues of information leaks, the operation of securities lending and foreign exchange markets, as well as what actually occurs in the clearing process today, must be addressed before the industry begins looking at re-engineering firms’ back-end processing facilities with blockchain technology. He also illustrates how the challenges for blockchain adoption break down by market segment.
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Tabb says: “Finally, with one technology we can totally rethink the anachronistic settlement and clearing process that has plagued both banking and financial markets.” However, getting there will not be easy. Blockchain has substantial capabilities to help facilitate, trade, track, and automate the processing of many types of securities, but in order for the public blockchain to replace the core of the world’s traditional central clearing solution for equities, sovereign debt, or any liquid product, many massive and, in some cases what seem to be insurmountable, challenges need to be overcome across banks, investors, custodians, and industry infrastructure.
Putting these challenges in context, Tabb looks at eight major issues including ownership, securities lending, foreign exchange, allocations/confirmations, physical securities, fractional ownership, netting, and technology challenges across the sub industries of investing, custody, the institutional sell-side, and retail brokerage. The report also scores these challenges by strategy, operations, technology, risk, and potential opportunity.
A related research report published by the Tabb Group in November 2015 talked about how blockchain-powered systems are only a matter of time, but why they will enhance – won’t replace – conventional clearing houses.