Blockchain and settlements: are there real savings or is this hype? (Premium)

There has been a LOT of noise about blockchain and settlements in the last week – the decibel level is approaching 10 on the hype-o-meter. This article reviews commentary and white papers from some big players with big things to say. We’ll also be hashing this out in person at the Finadium 2016 Conference on March 15 in NYC.

Ripple’s new white paper. First up is a white paper from blockchain IT provider Ripple, “The Cost Cutting Case for Banks.” Ripple makes the case that using blockchain can save financial market participants 33% on their international payment infrastructure costs, and more if users switch to Ripple’s native currency and eliminate redundant Nostro accounts. See the chart below. Notably, Basel regulatory costs decline by up to 99%. We found something similar about Basel costs and settlement times that we wrote up in “Basel III regulation gives a specific reason for why blockchain will save banks billions in regulatory costs.”
Ripple savings
According to Ripple, “In the end, the exciting potential of the new technology lies not just in the cost savings banks can extract from the old system but the possibility to enable new models and businesses entirely.”
New blockchain, old infrastructure. We’ve had several conversations in recent weeks with both market participants and vendors who note that although blockchain can be a great step in helping smooth out operations and technology, there is a huge amount of work that has to happen at each individual institution to make the potential of blockchain into a reality. As one person noted, “blockchain is great, but we have a ton of work to do once the information gets to our door. It’s not that easy to integrate.” Larry Tabb had a MarketWatch article where he noted something similar (the article, “5 problems with using blockchain to speed up share trading,” is worth a read, although we don’t think he got the mechanics right on how securities lending would work with blockchain.)
Demo projects. Firms have begun to announce some really interesting demonstration projects using blockchain. The big one is the Australian Stock Exchange, ASX, partnering with Digital Asset Holdings on a new settlement system. Yesterday JP Morgan announced they would be testing blockchain for US dollar transfers between the US and Japan.
Wired Magazine on blockchain and Wall Street. Wired Magazine ran a really good piece last week, “Why Wall Street Is Embracing the Blockchain—Its Biggest Threat.” Author Cade Metz has been covering this beat for a while and has gotten to understand some of the nitty-gritty of settlements and securities processing. The latest article is about the DTCC stepping into the blockchain ring and receiving approval from the SEC to issue stock using the the blockchain. A good quote: “As the DTCC’s Palatnick tells it, collaboration is his organization’s big aim. So many different companies have explored the blockchain for use in the financial markets, he explains. But what’s really needed is an overarching effort to build systems that work across all these companies. “Many firms were doing private experiments on this collaborative technology, which seemed a little counterintuitive to us,” he says. “We saw a chance to use our role as industry-owned to create a direction for the industry, and help lead the industry.” If the financial industry is to get ahead of the tech curve, he explains, it must do so in a considered and collaborative way.”

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