Blockchain is continuing to march at the forefront of the fintech boom and one can clearly notice the ramifications for system efficiency and simplification across the investment banking ecosystem. While the impact is likely to be huge long term, the technology is still going through the typical growing pains of a somewhat nascent player in an entrenched and complex capital markets world.
A brief introduction about blockchain technology
Blockchain uses blocks of data or other records in a chronological chain sequence in a shared ledger across various counterparties to a transaction. This cryptography-powered, distributed messaging system allows for authentication and verification for a number of purposes. At the event when a specific transaction ledger is approved by all the parties pursuant to the transaction, the block of ledger gets added under a chain sequence.
Blockchain and Investment Banking
When it comes to investment banking, there are several areas where blockchain is likely to greatly disrupt:
- Trade Reconciliation for deal escrow
- Know Your Customer (KYC) rules
- Anti-Money Laundering (AML) laws
- WORM (write-once-read-many) compliance data archival
- Compliance tracking & process automation
Investment banks are required by law to perform their own “Know Your Customer” (KYC) checks according to the specific jurisdictions in which they reside. Using a shared-client database in a blockchain, investment banks will have the ability to on-board previously-KYC-validated investors from other financial institutions. Common KYC documents will be immediately accessible and validated across the nodes on the chain. The chain can also help alert investment banks of potential “bad actors” through AML using the same sequenced chain validation process. Any known or suspicious persons will show up across the database chain, allowing dealmakers immediate access to data relative to potential bad apples. According to Goldman Sachs, they estimate the global cost savings of AML and KYC compliance to be as high as $6 billion a year.
KYC and AML processes are not the only areas that immediately benefit from blockchain technology. Any system or process that requires significant third-party intervention is likely to be disintermediated by using this type of validation. The lucrative business of stock transfer agents use a manual process for verification of securities, including things like “gold medallion guarantee.” Blockchain will virtually destroy the traditional business of stock transfer agents. When computers can do the work, margins drastically dwindle and people get moved to other tasks.
Fortunately, blockchain technology is much more than just bitcoin and cryptocurrency. In fact, blockchain will be extremely beneficial as crowdfunding an other legitimate online capital formation tools march forward in the disruption of traditional investment and finance. Unfortunately, the technology is still in its infancy. As such, banks are likely to start small and work toward full implementation over a several year period. This experimental phase will also see greater developments in how the technology can apply to various situations. It is likely the most simple and mundane will be disrupted first, but as the technology improves and the operators’ familiarity with the tools increase, we would imagine implementation will encompass more complex versions of similar processes. Deal syndication opportunities among a large handful of FINRA-registered investment banks is likely to be a complex process with huge upside, but the technology isn’t quite mature enough yet to facilitate such a process with ease and efficiency yet.
Where do you think blockchain technology is headed next? Let us know in the comment section below.