As the third and final article in our series on blockchain technology, we will discuss how the burgeoning technology will affect the financial industry.
To review, blockchain in general can be described as a decentralized, shared, public ledger that is maintained by a network of computers that verify and record transactions into the same decentralized, shared, and public ledger. No single user controls the ledger – it is maintained by all of its participates, in the cloud, or by a network of designated computers that collectively keep the ledger up to date and verify its transactions. As such, blockchain creates irrefutable records of transactions, creating trust between counterparties and eliminating the need for clearing houses or middlemen in transaction.
As mentioned in our prior article, modern banks and other financial institutions face the biggest and most sweeping changes as blockchain is implemented across the industry. According to a 2018 report from the accounting firm KPMG, the implementation of blockchain in the financial industry will have numerous major benefits, such as increasing efficiency, reducing loss and fraud, improvement to client/customer experience, and will result in a higher availability of capital. Also as previously discussed, per a 2017 study conducted by Gartner, Inc., it is estimated that the business value-add of blockchain will likely exceed $3.1 trillion by 2030, most of which will accrue in the financial or financial-adjacent industries.
As a financial professional, banker, or even a consumer of financial services, you may be asking yourself, “what do these changes look like?” While “increasing efficiency” may sound esoteric, using a universal and automatically verified ledger for financial transactions within a given entity or marketplace will clearly streamline accounting and auditing systems. Moreover, a universal and irrefutable ledger provided by the implementation of blockchain in a given system has the potential to drastically reduce loss and fraud. However, as we will illustrate, the most exciting implementation of blockchain is coming in the form of new and innovative financial products.
Lawyers, computer programmers and financial professionals all over the world are in the process of developing “smart contracts” that imbed traditional financial products with blockchain technology. These “smart contracts” not only take advantage of the security features provided by blockchain, they provide an opportunity to connect and digitalize every aspect of financial services and transactions. Upon the full realization of blockchain technology, data will be shared across disparate services and technology, from bank accounts to mortgages to smart appliances to regulatory registries, which will all continuously record and cross-check into their own respective universal blockchain ledger. Imagine:
- A mortgage that connects to the blockchain ledger at local the County Recorder’s Office that will automatically notify the lender if an impermissible lien is placed on the property.
- A smart car that will drive itself to a repo lot as soon as there is a 30-day delinquency in the blockchain ledger that records the payments on the loan used to purchase the vehicle.
- A bond that connects automatically to a company’s blockchain ledger and converts to equity upon certain financial performance metrics, which then in turn can automatically pay a dividend based on the number of widgets sold in a given quarter.
- A contract for life insurance that will reduce your monthly payment when your smart watch records exercise activity (or increase your payment when it connects to your bank account and sees one too many fast-food stops).
The beauty of these financial products is that they involve no middlemen and no back-office support, as such transactions will be automatic and seamless. The possible innovations are only limited by the imaginations of creative and tech-savvy lawyers who can marry finance with the complicated technical and legal aspects of implementation.
Fortunately for the banking and financial industry, and the individuals who consume their services, these changes are not going to occur overnight. Given the recent implosion of what is now being referred to as the “Bitcoin bubble,” the notoriously conservative financial industry is likely taking a second look at some of its blockchain initiatives. Moreover, new blockchain dependent financial innovations will have to be proven safe, fair, and reliable to staid regulators.
However, like in all major industry shifts, there eventually will be winners and losers. Just as the internet took traditional retail by storm, slow-moving incumbents will likely suffer relative to their peers who benefited from early adoption of blockchain technology.
By Wesley King
Associate at Frandzel Robins Bloom & Csato, L.C.