This is what the future of financial services looks like

2016-07-27 15:29

Blockchain, the online distributed ledger technology that acts as the public ledger for bitcoin, has the potential not only to fundamentally disrupt the global financial services industry, but also disrupt how monetary instruments and assets are transferred, stored and traded. 

Farzam Ehsani, leader of Rand Merchant Bank’s ‘Blockchain’ initiative and one of the founders of the bank’s FinTech unit, told a recent forum at the Gordon Institute of Business Science he believes Blockchain technology will be as transformative to our financial system as the internet has been to global communications. 
What is Blockchain

Blockchain is a superior database where stored data is encrypted, and access to the data is also encrypted. The distributed nature of the network across many computers means that it has built-in redundancy and transactions are immutable. This means it is impossible to alter the record, creating a credible audit trail. On

Blockchain, multiple copies of data exist across multiple computers, creating a peer-to-peer network. 

Use of Blockchain has begun to grow beyond its initial deployment for the Bitcoin cryptocurrency system, as a tamper-proof database that can verify the validity of all transactions. 

Ehsani explained that until 2009, no one had transferred value digitally from one person to another without a trusted intermediary, such as a bank. The Blockchain protocol makes use of consensus to build trust, as all the computers in the network have to agree whether a transaction is valid or not. This allows for instant and direct settlements and does away with the need for intermediaries. 

Future possibilities 

In the future, financial instruments such as equities, bonds and derivatives, as well as physical assets such as property and cars will be issued onto the Blockchain. 

“Imagine the possibility of buying or selling a house, and it being transferred into your name, in a matter of not weeks or months, but seconds or minutes,” Ehsani said. 

“This is not some crazy unbelievable theory, but will become reality in the not too distant future. There is no question this will happen; it is just a matter of time.”

Blockchain’s potential to transform the financial services industry post-trade means transactions could be streamlined and simplified so as to cut the costs and counterparty risk associated with clearing and settlement. 

Ehsani said Blockchain has the ability to disrupt the payments, or value transfer, and value storage offerings that banks currently provide. As value transfer accounts for 40% of total global banking revenue, an opportunity exists for banks to reduce costs. 

Changing the financial landscape

“Blockchain will change the financial landscape” as central banks could be on the Blockchain network and see all transactions in real time, Ehsani said. 

While cryptocurrencies are currently non-sovereign, several central banks are considering issuing their own virtual currencies on the Blockchain, so that the potential exists to transact directly with them, bypassing commercial banks. 

Tanya Knowles, head of Innovation and Projects at Strate, South Africa’s authorised Central Securities Depository, explained that “the world is changing and the way we interact is changing. Blockchain has huge potential, not only to make existing processes faster, but also for the peer-to-peer economy.” 

While familiarity and adoption of Blockchain technology remains low, Knowles said she believed implementation in emerging markets was likely to be faster, as there aren’t legacy systems and legislation to hold these countries back. 

Widespread adoption of the technology is still some time away, but collaboration would be crucial to Blockchain’s ultimate success. This includes collaboration with partners across the financial services industry, as well as regulators and central bank authorities. 

Blockchain is forcing South African financial institutions, which are used to competing for market share, to adjust to a new collaborative paradigm, Ehsani explained.

“Most money in the future will be on the Blockchain, regulated by central banks. It will allow for instantaneous payments and smart contracts. But it is still very early days for possible revenue models,” he said. 

Potential pitfalls

As a technology that is still in the early stages of its development, Blockchain does have potential pitfalls and unexplored outcomes. The technology is not completely immune to cybercrime, as collusion among users could theoretically result in modifications; while regulatory and dispute resolution issues are in their infancy. 

Ehsani said the socio-political implications of Blockchain are a cause for concern as the potential exists to penalise a country with a lack of computing power and exclude them from the system, which could cripple a small economy. 

However, at this early stage of Blockchain’s development, Ehsani said the most critical task was to gain a clear understanding of what the Blockchain is.

“Don’t be deceived that it is just a technology in its infancy, as you may live to regret your decision,” he concluded. 

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May 19 2019