What is Blockchain and what could its impact be on financial markets?

Blockchain is one of the hottest topics in financial services, and in the FinTech market in particular. It is expected to have a massive revolutionary impact on financial services and the way that transactions are managed and protected. All the major banks and financial institutions are investing heavily into blockchain and are exploring all the potential uses for this new technology as a way of improving their business processes and to achieve a competitive advantage. But what exactly is Blockchain and what impact.

What exactly is Blockchain technology?

Blockchain is a decentralised ledger of all transactions across a peer-to-peer network. This distributed ledger is essentially an asset database that can be shared across a network of multiple sites, institutions, businesses, and geographies. In more simple terms it is a platform for verifying and recording transactions that are made digitally and that can’t be erased at a later date. If the Internet is the foundation for digital innovation of all kinds, blockchain technology is the underpinning of a radical rethinking of how we pay for things—as well as how we verify who owns what and who has the right to buy and sell it. What makes blockchain specifically unique is that it is a decentralised platform that relies on cryptography instead of a central authority. This means that there is no central administrator of the ledger and therefore no central data storage. In its current application, underlying Bitcoin, the buyer and seller interact directly without needing verification by a trusted third-party intermediary. Transactions are not anonymous, but they are pseudonymous: a transaction record is created, but identifying information is encrypted, and no personal information is shared. With its application currently specific to a peer-to-peer network the real impact occurs when the technology spreads beyond those networks to financial institutions.

What impact could it have on financial markets?

It has taken time but financial institutions are starting to get to grips with the technology and its universal application for their businesses. Traditionally, when companies co-ordinate they can do so either by sending data to each other with each party having their own opinion about the accuracy of the database or they can use the services of a third-party to validate and own the data. Blockchain disrupts this model giving all parties involved in the transaction independence and a guarantee that the transactions are correct without either of them, or a third party, being in control of the ledger. There are many possible use cases; smart contracts, identity management, digital asset management, data processing, e-businesses (fully-functioning business entities with the ability to deploy an entire organization remotely, by allowing all remote parties to interact with a functioning e-business via blockchain); some theorize that there is the potential to replace cash fully with digital currency in years to come, depending on how the technology is adopted. Digital currencies such as BitCoin and Ether are already being traded at a high profit for individuals who entered and gathered cryptocurrency in the early stages of the crypto mining rush – the value for BitCoin as of March 24th is recorded to be $995.03 per 1 BitCoin, while the new hottest competitor Ethereum is valued at $47.28 per 1 Ether, according to CryptoCompare.

One of the biggest problems for banks and brokerages is that they have traditionally been the trusted third party intermediary. With this technology, the need for a trusted third-party middleman is significantly lower. But, for these businesses that are managing transactions the technology allows them to use the blockchain anywhere that records are stored digitally and in any type of transaction that currently needs to be verified by a trusted third party. In the financial market alone, there are already major institutions that have started looking into the application of this technology including UBS, Societe General, LSE, Citigroup, Barclays, Deutsche Bank, Goldman Sachs, JP Morgan, and many others. But, it’s likely to extend beyond financial institutions as we start to understand the technology better.

Blockchain brings a certain level of autonomy and accuracy to our lives. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where Blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism. It is still very early days but we expect the blockchain to continue to dominate conversation in the financial markets and we will be keeping a very close eye on developments and the impacts and opportunities for our clients and candidates.

By Alexandra Pendergast, EC1's resident Blockchain specialist

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