Blockchain, or distributed ledger technology will bring wholesale disruption to the financial services industry.
Blockchains enable transactions to be completed without reference to a trusted third party, thus disintermediating financial services players.
A blockchain is a verifiable list of every transaction ever executed within a system. New transactions are added to the ‘chain’ in ‘blocks’ and quickly verified by members. The chain is visible to all parties. No party can change the chain, since it would differ from all other public copies, demonstrating fraud. The tech was invented to support the crypto-currency Bitcoin. This distributed ledger technology disintermediates existing players. Because the tech relies on peer-to-peer networks to verify transactions, it does not need a centralised institution like a bank to enable transfers of value. The technology also makes transactions faster and cheaper. Decentralised processing reduces the time needed to verify and execute transactions, lowering costs. Transactions can be verified in seconds rather than days. Last year over $500m was invested in start-ups across asset classes. New entrants are disrupting markets such as IPOs, secondary trading and offshore remittances. The Bitcoin ecosystem is also attracting substantial investment. Leading financial institutions are investing heavily in response. R3 is a consortium of over 40 institutions, including Goldman Sachs, CBA and UBS that aims to establish consistent standards and protocols around distributed ledger technology. Incumbent players are also investing in start-ups. All players need to understand blockchain technology. This includes all financial markets players, but the tech could ultimately extend to markets as diverse as real estate transactions or car financing.