The case for revolution is easy to state given the remarkably complex and balkanized global system for settling security contracts. Settlement involves the exchange of ownership for payment for a stock or bond after a deal. The model delivers settlement and collateral movements which, though much serene than they were 20 years ago, are still typically measured in days rather than minutes or hours. Tension for a cheaper system, such as near instantaneous settlement of trades, is coming from banks wanting intense expense savings to deliver improved returns on equity to consumers.
Shares are typically settled within two days of a deal, a delay which forces banks to set aside capital and collateral in case the transaction goes wrong. In the meantime, Andrew Hauser, executive director, banking, payments and financial resilience said said “one widely touted driver of change could be the use of blockchain or distributed ledger technology which underpins the bitcoin digital currency”. It provides a record of transactions that can’t be altered but can be acquired by majority. Supporters say it promises seamless, real-time settlement that cuts out many intermediaries in the current settlement chain.
There is no likelihood of such an extreme revolution occurring any time soon, Mark the 20th anniversary of Crest, the platform that settles UK stocks and bonds transactions. Much more work is needed across a whole range of issues; including speed and scalability, confidentiality protections, developing common protocols, integrating cash and securities movements, and establishing regulatory and legal norms. The sector will take heed of Hauser’s words given that Britain is set to leave the European Union, and set its own rules for the settlement and payments sectors, In many cases, reform to outmoded business processes will need to precede any application of blockchain. There is clearly scope for less ambitious but still potentially transformational applications in specific markets, not least those where current infrastructure is less well developed.