Finance in the Firing Line of Blockchain

Blockchain will absorb the world of finance. This was Richard Olsen’s message to Finance Magnates in his 2016 interview with the publication. Olsen is the founder and CEO of Lykke, a new kind of currency and asset exchange built from the ground up for a future reality that banks are still largely ignorant of: an automated, decentralised web of value. In that Web 3.0 future, where no trust need be placed in centrally owned or controlled institutions, the world of finance will be changed forever.

The future I’m describing is one underpinned by blockchain and crypto-assets; the kind of emerging technology and assets that so many new fintech startups such as Lykke deal in. Like many other startups in this space, they’re taking advantage of new technologies in ways incumbents are not, systematically stripping functions from those incumbents, and improving upon them. It's not surprising then, that a recent LinkedIn survey found 44 percent of fintech professionals and 35 percent of investment bankers said blockchain in particular is an emerging technology they're keeping a keen eye on.

While the most fascinating applications for blockchain aren’t actually finance at all, I’ve written and spoken about them to the exclusion of finance almost entirely. With the momentum of Bitcoin and Ethereum exposure building exponentially, I felt now was the time to help finance industry actors better understand just a few of the reasons why jobs are at risk, and why entire operating models sit firmly in the sights of blockchain-enabled disruption.

Traditional markets require facilitators. If investors can trade with each other directly using blockchain based systems — requiring no middlemen by design — then stock brokers simply aren’t needed anymore. Blockchain’s ability to achieve this lies in smart contracts, which is the ability to programmatically create contracts and execute them without any human intervention.

Traditional trading poses unnecessarily high barriers to entry. The cost and complexity of trading stock is highly exclusionary, yet crypto-assets can be traded quickly, inexpensively, by almost anyone. Even teenagers are already trading cryptocurrencies in a day-to-day fashion, with frictionless and simplicity unknown in traditional trading. Crypto-assets mean for investing what the internet meant for content publishing — now anyone can do it. This change presents complex problems, but with it comes what are likely to be profoundly positive changes for wealth creation opportunities for the masses.

Traditional finance provides no direct ownership of assets. When you see your money or your stock, this is largely an IOU (“I owe you”) from a centralised institution. To trade stock or move money requires intermediaries. Blockchain fixes this, removing the intermediaries, and delivers full and direct control to holders. Your private key provides access to your parts of the blockchain, a ledger without central control. Even ownership of a physical asset such as your house is only recorded by a network of intermediaries. Instead, thinking about a world where we record and respect ownership detailed on a blockchain provides immutability and visibility, ensuring that what is yours is yours.

Banks charge commissions and high fees. Funds sent abroad by consumers isn’t cheap to facilitate, and isn’t cheap or simple for consumers to organise. A big part of why this is the case is the involvement of manual labor and bank processes built atop of legacy systems, long starved of innovation, resulting in a high cost base for operation. Crypto-assets are borderless, facilitated by peer-to-peer networks of computers, charging comparatively miniscule fees to pay for the use of their compute cycles and energy consumption. This reality remains the same regardless of where and and to whom they are sent, and the transfer of money or asset is near instant.

Fiat requires trust. As alluded to already in various ways, whether it is utilising institutions for buying stock, for transacting digitally, or the use of dollar bills no longer backed by gold and subject to counterfeiting, our current way of exchanging value requires trust. Cryptoassets require no trust and no institutions, even if some blockchain models choose to. Cryptocurrency such as Bitcoin cannot be counterfeit, and exchanges are facilitated and enforced by contracts written in open-source code — available for anyone to audit.

In short, the pillars of blockchain difference and benefit include transparency, zero counter-party risk, lower transaction costs, and settlement in almost real-time.

While it’s clear that blockchain has the ability to erode bank profits, and potentially even make them redundant, blockchain also presents ability to actually improve bottom lines and operating efficiencies, freeing up resources to apply more focus to an area most banks severely lack: the customer experience. The reality however, is that improving bottom lines using blockchain will mean trading back office staff for code - a reality that 25 percent of all finserv professionals are aware of, being concerned that automation will impact their job security. A real world example are the various ‘smart bonds’ trials underway right now, where interest payments are made without using a middle or back office, or registry.

Analyst Johann Palychata aptly wrote in Quintessence magazine that blockchain “should be considered as an invention like the steam or combustion engine.” Indeed, blockchain could fundamentally change how society organises itself. Banks should ignore blockchain — benefits and detriments alike — at their own peril. This technology should be prompting the entire finance industry rethink their value chains, from top to bottom, with unprecedented priority and speed. If they don’t, the result may be that they find themselves becoming what the taxi industry has become to Uber.

While you’re here, check out Horizon State. We’re leveraging blockchain technology to redesign the way that opinion is solicited, votes are cast, and decisions are made. Building atop of distributed ledger technology, we’ve created a digital ballot box which cannot be hacked, and is many multiples cheaper to run than traditional voting processes. Our technology underpins the world’s first public blockchain based voting system in wide use, developed for use by MiVote.org.au members.

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