What the Blockchain Means for Banks

wall-street

Banks have woken up to the potential for distributed financial technology. Photo: William Beem

Euromoney has a great primer on the impact of distributed ledger technology, penned by Peter Lee.

Lee begins with his story with a broad, technical overview of distributed ledger technology, but the meat of the report arrives when he begins to contextualize the blockchain’s transformative impact on the banking industry.

“The banks are now gripped by fear of missing out,” Lee writes.

The result of that, of course, is that financial institutions are piling onto the blockchain bandwagon, as we reported last week. It’s also because they are hoping the blockchain to be a quick and easy fix for their problems, having failed to invest in their own “creaking systems” in over a decade.

As Earthport president Daniel Marovitz—who spent 11 years at Deutsche Bank, serving as CIO of global banking and markets as well as head of product management of global transactions—explains:

“In the seven years since the crisis, they’ve had much less money and been spending most of it on regulatory compliance. So it’s 15 years since the last time these banks invested much in their systems, many of which were turned on in the 190s and some in the 1970s. A person can sit in New Zealand today and stream gigabytes of data to watch Breaking Bad from the US in real time, but sending the money to pay to receive it can take four days. So a lot of the banks are thinking: ‘My systems are creaking, I have limited budget to invest. Maybe the blockchain is the answer.’”

Lee notes that the “dirty secret of banking” is that financial institutions have profited greatly from the inefficiencies of the banking system, where “trapped cash was a free good.” But new regulations have put an end to that practice.

Goldman Sachs president and COO Gary Cohn explains, speaking on an IIF panel in Lima:

“Think about the way we settle: T+2—that was the 1920s/30s/40s—you were literally, manually moving money. We don’t see telexes anymore, we do it all electronically. In the situation that always makes me cringe the most—the dollar/yen transaction—you deliver dollars 19 hours later, and I have that sitting on my balance sheet, which I have to capitalize as an intraday credit exposure: whereas blockchain technology settles that in real time. It frees up the credit risk, my regulatory capital, everything else.”

“No regulation is not a problem,” Royal Bank of Canada CEO Dave McKay explained, mirroring Cohn’s sentiments in an interview with American Banker. “The biggest barrier to adapting is the incredible legacy systems.”

Read Peter Lee’s full report on Euromoney