The credibility of blockchain
The concept of distributed ledger technology — or blockchain as it is commonly called — has taken the financial services sector by storm, with venture capital and investment pouring into technology startups. Debate over blockchain’s promise, as well as its limitations, is ongoing. For every believer who says blockchain is the most revolutionary technology platform to emerge since the internet, there are skeptics who claim it is merely the latest tulip mania.
Nonetheless, a broad consensus is emerging that it represents a real innovation over many of the systems and processes used in financial services and banking today.
Our view of the credibility of blockchain technology is informed by candid discussions with clients, banks, exchanges, central securities depositories and existing market service providers. There has been an influx of attention and initiatives from market participants, including startups and newly formed industry consortia focused on driving technical standards and fostering collaboration.
While in the United States, the Depository Trust & Clearing Corp. is fielding proposals for a complete replacement of its credit default swap (CDS) settlement and reporting infrastructure, the Australian Stock Exchange is attempting to address changing regulatory requirements with a blockchain-based pilot. Regulators such as the Bank of England and European Securities and Markets Authority (ESMA) have published thoughtful commentary on the feasibility of digital cash and distributed ledger technology. Collectively, the tone of conversations has shifted from “Is this worth exploring?” to “How do we best engage?”
Financial commitments to blockchain are also growing. Investments in blockchain startups to date have reached $300 million, a figure that is growing swiftly. Investments totaled $125 million in 2015, and this has already been surpassed in the first half of this year. Although predominantly venture capital-backed, a handful of companies have attracted significant bank investment. Furthermore, we see growing internal spending by banks, which we estimate totaled $80 million in 2015.
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