There is no doubt that the development of blockchain will impact all areas of business, with a particular focus on the financial services industry. As Hong Kong, along with the likes of Singapore, has taken a very proactive approach to this new technology, it makes sense to look at the potential impact in more detail.
What is blockchain?
Used in various situations today, blockchain is a technology that supports a decentralised ledger for the recording of transactions. The beauty of the technology is that both sides of the transaction can deal directly with each other, saving significant costs and time. However, this is just scratching the surface of the potential of this groundbreaking technology.
Blockchain and the financial services industry
In theory, the number of areas in which blockchain could assist the financial services industry is enormous. We will now take a look at some of the more prominent activities which will be enhanced by the use of blockchain:-
Security
Before we look at individual elements of the financial services industry which could benefit from blockchain, it's essential to recognise the security aspect. Due to how the technology works, it provides a near-unbreakable ledger which will identify and clarify each transaction. So, as each transaction is verified along the way, this ensures that the published information is correct.
Streamline payment systems
When you consider the enormous amount of money transferred worldwide daily, there are potentially substantial cost savings in this area. Blockchain technology strips away the need for third parties, allowing the sending and receiving sides to work directly with each other. In due course, the cost savings are expected to run into billions of dollars a year.
Asset management
Blockchain technology can potentially provide colossal efficiency and speed gains for the asset management industry. Smart contracts will ensure that prearranged agreements are executed when predefined conditions are met. This could prove helpful with trade clearing and settlement, potentially leading to not only significant cost and time savings, but also reduced market risk.
The tokenisation of digital assets can also be facilitated by blockchain, which will enhance market liquidity, support fractional ownership and bring additional investment opportunities to global investors.
Regulation and compliance
As we touched on above, due to how the blockchain is created, each transaction is dependent on earlier verified transactions which will be of huge interest to global regulators. Whether looking at anti-money-laundering regulations or potential market abuse cases, the transparent and tamperproof records will prove invaluable. The fact that the information provided to regulators is already verified will also improve accuracy, reduce costs and automate much of the regulatory process.
Stock-market investments
As with many new inventions/technology, it is not necessarily the business end where the big money is made, more providing the "shovels and spades". In a similar fashion to the gold rush, where those providing the equipment enjoyed huge returns, those providing dependable blockchain services could prove attractive to investors.
Summary
It is frightening to think that blockchain technology is still in its relative infancy despite the potentially huge benefits. As other markets adapt, the financial services industry already incorporates blockchain in many back offices. Improving protection for companies and clients, it also has the potential to enhance investor confidence in stock markets. Will smart contracts become commonplace in the short to medium term?