By Sophie Smith, Head Of Data And Technology Consulting
Why has blockchain become a compelling strategic priority for financial firms?
As blockchain and digital token technologies evolve, they should be firmly at the forefront of the strategic agenda for financial firms. In Deloitte’s 2021 Global Blockchain Survey, more than 80% of top financial industry pioneers said there was a compelling case for using digital assets, blockchain and or cryptocurrencies in their business. This shows that finance leaders believe blockchain technology is worth the investment, and that it has become a priority across the industry.
The technology underlines public infrastructure—such as Bitcoin and Ethereum—and centralised distributed ledger technologies (DLTs)—which are required for smart contracts and clearing.
Here’s how to understand the value proposition of blockchain technology. In the past, physical peer-to-peer systems were used to exchange goods or information. Whereas now, we have migrated to an intermediary-led ‘system for exchange’. Looking ahead, blockchains offer digital peer-to-peer networks in which the need for intermediaries to provide security is removed. This allows users to exchange value or information directly with each other, knowing that trust is not compromised.
DLTs— together with Proof-of-Stake, Proof-of-Work, or Proof-of-Vote validation mechanisms— allow blockchains to mitigate most of today’s widespread security risks. By securely automating processes— such as transaction settlements, notary services, verification efforts, or document transfers— blockchain technology provides a highly secure, low-cost, and low-maintenance alternative to many of today’s financial services systems.
A seismic shift in the industry
Most industry executives agree that blockchain technology is broadly scalable and has attained mainstream adoption, and the benefits for the sector are impossible to ignore. The technology is ‘low friction’, which means it avoids manual validation procedures and enables real-time settlement, lower fees, and more effective auditing. Looking to smart contract protocols specifically, programmable trigger conditions and automated execution comfortably facilitate high-volume standardised documents.
Understanding the options
One blockchain is not necessarily like another, and there are differences between Public, Private, Hybrid and Consortium options. In finance, it is particularly relevant to consider security and regulatory concerns in permissioned infrastructures, i.e. centralised systems that use DLT.
In this set-up, which is distinct from the public blockchains of popular cryptocurrencies, a regulator or central authority provides decision oversight for executive functions, including monitoring the digital identities of participants. This is more appropriate for financial institutions that are unable to operate over open protocols without suitable due diligence of participants. Smart contracts and clearing lifecycle are facilitated through digital exchange that speeds up processing time, and reduced friction between participants.
An ESG perspective
When considering blockchain through a green lens, we often discuss the overwhelming energy required for the mining of Bitcoin. Sometimes we also think about the positive environmental, social, and governance aspects. Blockchain technology is used to enhance the issuance and traceability of Green Bonds, and to improve supply chain transparency.
But it is going much further. The Ethereum Merge event offers an exciting transition from the Proof-of-Work to Proof-of-Stake validation system; a change that promises smaller fees and reduced impact on the environment.
