Broadridge APAC head David Becker discusses the potential of blockchain technology and the challenges that hinder its evolution.
Blockchain technology is already reshaping how business is done globally but serious doubts remain. This is revealed in a recent report by Broadridge and Bain & Company titled ‘Blockchain in Financial Markets: Gaining an Edge’ showing how blockchain is gaining significant momentum in financial markets. It said that more than 80% of financial markets executives interviewed are expecting the impact of blockchain to be “transformative” and be adopted by financial institutions by 2020. However, the same survey also revealed that more than a third or 38% of those surveyed said they are taking a “wait and see” approach to the technology.
What do these contrasting results have to say?
David Becker, head of Asia Pacific at Broadridge believes that financial firms can no longer ignore the impacts of distributed ledger technology (DLT) on market structure and they see Asia at the forefront of innovation and adoption of blockchain.
“Most Asian markets benefit from a centralised and integrated infrastructure run by a single exchange and a proactive regulator who can work together to foster innovation. This will allow blockchain to be adopted more quickly in Asia than in other parts of the world,” he explained.
To delve further into the vast potential that blockchain technology offers in Asia, Singapore Business Review spoke with Becker.
SBR: What are your views on the potential applications of blockchain technology in Asia?
The applications where blockchain is expected to make its presence felt first are in processes with one or more of the following attributes: 1) significant clearance and settlement latencies; 2) manually intensive processes; and 3) lack of robust processing infrastructure. Examples include OTC derivatives, private stock transactions, syndicated loans, cross border FX and repos.
There is a significant amount at stake for companies and the industry. Our survey estimates the total cost and capital savings to global financial market ecosystems to be between US$15 and 30b (or around 1-3 basis points of total assets). Important long-term benefits are also likely to be driven by improved reference data, analytics and applications of machine learning and artificial intelligence (AI).
The adoption of blockchain in the financial industry will drive significant benefits to market participants, including operational and cost efficiency. We are already seeing participants such as the Australian Securities Exchange (ASX) taking a leap in investing in this transformative technology by using it to upgrade their post-trade system. We believe that blockchain has the potential to transform settlement and clearing in particular. While trades can be executed in milliseconds, it can take as long as three days for that transaction to settle. With blockchain, execution, clearing and settlement could happen simultaneously, minimizing liquidity and credit risks. Beyond trading, blockchain has the potential to change the way firms interact with their clients in areas such as proxy voting, an area we have piloted successfully using blockchain.
SBR: How does the progress toward blockchain adoption differ across markets in Asia, including in Hong Kong, Singapore, China and Australia?
In our blockchain report, we identified four market archetypes, each with distinct implications for how and when to adopt blockchain:
- In large, complex, and mostly domestic markets such as Japan and China, blockchain is likely to reinforce a relatively integrated structure for cash securities.
- Smaller, domestically focused markets like Australia could see the earliest impact in cash securities. These markets are already integrated and centralized, and therefore face fewer obstacles than other market types.
- Small markets with strong international connections, such as Singapore and Hong Kong are more likely to remain integrated for cash securities but more subject to global market practices and links in derivatives and OTC markets.
- The fourth model, less applicable to Asia Pacific, applies to large financial hubs such as the US and major European markets. In these jurisdictions, blockchain could lead to even more unbundled and fragmented market structures due to the existence of multiple exchanges and utilities.
SBR: Are regulations and standards around blockchain lagging the evolution of the technology? What changes are needed to help incorporate blockchain into the current market structure?
Major adoption challenges still exist, given the complexity of capital markets processes. To resolve these challenges, strong industry collaboration between market participants and a positive regulatory environment will be essential.
Earlier this year, Broadridge hosted a series of blockchain forums in Tokyo, Singapore, Hong Kong and Shanghai. The Monetary Authority of Singapore (MAS), Financial Services Agency (FSA) in Japan and the Hong Kong Securities and Futures Commission (SFC) participated in these forums and expressed strong support for blockchain in their local jurisdictions. These overt endorsements come on top of supportive statements from regulators in Australia and China and the launch of regulatory “sandboxes” to facilitate research and development in Australia and Singapore.
Even though there is as yet no set timetable for when clear standards and regulations on the use of blockchain in financial markets will be developed, there are steps firms can take now to get their IT systems and processes ready. For example, they can invest in end-to-end IT frameworks that will work with new technologies such as blockchain. Many firms have opened test labs and launched trial use cases, which are valuable for learning about security challenges of blockchain. In this context, infrastructure providers such as Broadridge can provide meaningful assistance to get ready for what comes next.
SBR: What can banks do to compete in an environment where fintech, including some working with blockchain, is potentially disrupting financial services business models?
Almost every major bank has announced a blockchain initiative. Many are working with fintech firms that have developed innovative technologies that banks can benefit from to transform their businesses. Rather than competing with fintech firms, I expect to see these banks collaborate with them. There is no doubt that the industry is undergoing rapid changes enabled by new technologies, and the successful players will be those who are embrace them by working with fintech firms to optimise efficiency and accelerate business growth. The likely winners are already taking a systematic, top down and bottom up approach to blockchain efforts.
As a global fintech company, Broadridge works closely with clients to co-innovate in specific areas where Broadridge has deep understanding of clients’ technology and operations processes. One such example is our partnership with Santander, J.P. Morgan and Northern Trust to pilot a blockchain solution offering aggregated vote transparency and analytics for Santander’s 2017 Annual General Meeting (AGM). Broadridge also invests in leading blockchain start-ups and internally across a number of prototypes to enable our clients to be ready for adoption of the new technology. We are able to provide banks with global scale that will be crucial in the adoption, and that are difficult to achieve for small start-ups on their own.
SBR: How do you see distributed ledger technology affecting the evolution of the derivatives industry in Asia and globally?
Among the most promising areas for blockchain are complex OTC derivatives. These markets have a relatively small number of participants, making it easier to reach consensus on systems and policies. Relatively low volumes also mean lower investment requirements, and thus lower risk involved.
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