Blockchain’s Disrupting Role in Investment Banking

2018, 16 Jan | In Build Company Value, Capital Transaction Planning, Investment Banking, Personal Financial Growth

Blockchain’s Disrupting Role in Investment Banking

Blockchain technology makes it feasible to track the exchange of virtually anything (houses, money, car titles, stocks) without the necessity of relying on one single entity (i.e. a bank) to act as an intermediary.

Instead of relying on a middleman, blockchains are databases (i.e. super-powered spreadsheets) that run across a network of independent machines that use mathematics to objectively keep dibs on the changes of assets.

The most well-known use of blockchain technology is in tracking the exchange of the Bitcoin –  the cryptocurrency.

What blockchain technology promises is the offering of a significantly more secure, reliable, transparent, and automated process to exchange money, securities, and all other assets. Here is how:

  • The creation of a secure transaction ledger database shared by all parties in an established, distributed network
  • The elimination of third parties, as all assets are held in the cloud and tied to their owners’ identities rather than institutional custodians
  • All processes are automated without the need for human interference (which also eliminates error handling)

The final result is a reduction of infrastructure as well as transaction costs associated with contracting, including smart contracts, which eventually allow a consumer to purchase a home directly from another person, without having to include third parties.

This is fairly exciting for the everyday consumer – it gives them the ability to circulate currency on their own terms, without having to pay a percentage of every transfer to an intermediary.

You might think that the evolution of this technology would be welcomed with cold shoulders by financial institutions, as one could seemingly eliminate the need for a bank when it comes to, for example, buying a car.

However, the inverse is true. Banks are extremely interested in the potential that blockchain technology has to offer, which is why we’re seeing new developments on a regular basis in support of the technology:

  • Nasdaq OMX (the company behind the Nasdaq stock exchange) uses blockchain technology to oversee the exchange of private stock
  • The SEC recently approved Overstock’s blockchain stock plan
  • Linux has developed an open-source standard for blockchain technology (Open Ledge Initiative) that has attracted big names such as IBM, Intel, Cisco, J.P. Morgan, Wells Fargo and the London Stock Exchange

Why would financial institutions welcome this blockchain technology?

It’s true, banks make some money off transaction fees. But, in the grand scheme of things, the money acquired by these fees could be trivial when compared to the potential of streamlining the consumer’s investment process.

Blockchains make it easy and fast for both large institutions and independents/small businesses owners to, for example, set up an online store.

IBM – in discussing their support of the Open Ledge Initiative, stated that they believe that blockchain technology could help bring the Internet economy into the 21st century by decentralizing the web.

It has the potential for introducing a new level of automation and transparency to the business world, from stock exchanges to all other financial markets. With both automation and transparency being buzzwords of the 21st century, it’s about time that investment banking joined the fray.

Blockchain can make this possible, and it helps to simplify and modernize the investment process, not only for larger institutions, but for investors of varied  backgrounds and financial means.