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Proponents tout the potential of blockchain to make electronic financial transactions faster, cheaper, safer and more transparent.

What you need to know about blockchain – the most-buzzed about new financial technology

Do you believe the blockchain hype? Proponents tout blockchain’s potential to make electronic financial transactions faster, cheaper, safer and more transparent. Microsoft is getting in the act, Deloitte is rolling it out for artists, J.P. Morgan and Barclays are getting involved with bitcoin's key competitor.

While most agree that the impact of blockchain will be big, and that traditional banking jobs – particularly in the back office – could fall by the way-side, does anyone really know what's next? In a panel discussion at the Trading Show Chicago, high-frequency traders and even the Fed gave their view on how the technology will impact the industry.

Blockchain as a source of intelligence

Blockchain can help traders make sense of the huge amounts of data in the markets, and make more informed decisions about what could lurking on the horizon, says Tommi Vuorenmaa, the president of Triangle Intelligence, which specializes in high-frequency data analysis for traders.

“You can combine several sources of real-time macroeconomic data, add in social media data and make more accurate economic forecasts, which is fascinating for academics and traders alike, he says. “The idea is to use blockchain to make data as accurate and transparent as possible so people could correct any mistakes before forecasts are made, which would increase efficiency in the markets,” he said. “It’s important that small-time investors get involved and start using the currency, and that would help increase trust in blockchain.”

Revamping banks’ and asset managers’ IT infrastructure and reporting

It's no secret that banks IT systems are a vast network of sprawling, siloed technology infrastructures where teams work largely independently of one another. Inter-departmental collaboration would be much easier using blockchain, believes Rajeev Ranjan, policy advisor at the Federal Reserve Bank of Chicago.

“You can put all of the bank’s information in a single block, and give certain people access to certain parts of the block and hide the rest,” said Rajeev Ranjan, policy advisor at the Federal Reserve Bank of Chicago, on the same panel. “I like the financial reporting aspects, whether trade reporting or reports to the regulators – a standardized format and standardized access are provided by blockchain.”

Before the financial crisis of 2008, the industry used an ineffective way to look at counterparty traders. Ranjan suggested that smart financial contracts that are prefunded would be a good way to use the blockchain in financial services.

There are remarkable use cases for blockchain that can turn out to support real businesses, Ranjan said.

“One thing I really like about the concept of blockchain is the standardization of swaps, trading them and clearing them,” he said. “There are rules being implemented now, where you can actually go create blockchain solution for prefunded trading of standardized swaps."

Teething problems

But Blockchain is still a (relatively) new technology and is not without its problems. For a start, there are ongoing concerns about privacy in the settlement and storage of securities – blockchain providers are working hard to address.

“Bitcoin is a particular example of a currency on the blockchain, and in some cases we’re not clearing trades fast enough,” said Eddie Weinhaus, the chairman of Group. “That said, what the blockchain allows us to do that is different than the current system, everyone knows where everything is, we all know where every bitcoin is.

“You could have a database application that is somewhat open, have validation and security,” he said. “If we want something like the [traditional] exchanges provide that, blockchain could get an exchange up and running much more quickly with governance and openness taken care of.

“We as traders, we like it – we go to exchanges and they clear our stuff, and they know where our stuff is.”

Photo credit: Dan Butcher

AUTHORDan Butcher US Editor

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