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In 2016, blockchain technology will continue to make an impact on disrupting financial systems and ledgers. This technology is set to be the biggest departure from the long-standing financial bookkeeping practices upheld by financial institutions around the world. The most significant benefit from blockchain technology will largely derive from the elimination of complex processes and inefficient systems that govern payments and financial settlements. As we see it evolve, blockchain will continue to be applied to more cryptocurrencies and financial assets, led by financial intermediaries and banks.
Currently, most consumer financial transactions take place on a centralised platform, which stores a record of every transaction that takes place (for example, when you electronically transfer funds to a friend). With blockchain technology (also referred to as distributed ledger technology), participants hold a complete record of all transactions through peer-to-peer verification, rather than a central recording platform. This decentralised process means that every user of the technology maintains a copy of the entire ledger, and there is no third party or intermediary involvement (such as a clearing house, auditor or custodian).
What are blocks in a blockchain? The ‘block’ in a blockchain is information about the transaction and a timestamp. While a blockchain grows as more transactions take place, the chain remains in chronological order so all transactions can be easily verified using complex algorithms. Blockchain is the same technology which allows online currency Bitcoin to operate.
Break the Bank: ASX Adopting Blockchain
Last month, the Australian Stock Exchange (ASX) announced that it had bought a $15 million stake in US-based development firm Digital Asset Holdings, LLC. The stakeholding will now allow ASX to invest in developing distributed ledger technology for the Australian equity market. This announcement comes one year after the ASX announced it would upgrade all of its trading platforms and risk management systems by the end of 2016. The second phase will focus on ASX’s post-trade services currently provided by CHESS (Clearing House Electronic Subregister System), which manages the settlement of the transactions of shares.
The adoption of blockchain at the ASX will improve the efficiency of transactions. The ASX clearing house will remove itself from settling trades, and leave it for participants to settle through the peer-to-peer network. Brokers will be able also to record participant activity, including the price of shares, the quantity traded and the time of the transaction. While the ASX will continue to play an important role in an electronic exchange to place orders, the settlement functions will be outsourced to the network.
The peer-to-peer aspect of confirming the ledger of trades means that settlements can now take place instantaneously. Currently, the ASX takes up to three working days for a settlement period to ensure both parties have the funds and assets to exchange. With blockchain, shares are now much more liquid, meaning shares can change hands more quickly resulting in higher liquidity and more investments into the ASX.
Next on the Block
Blockchain is still relatively new technology, and it will take some time before it enters consumer banking. For the next few years, the technology may go unnoticed by consumers who will continue to use current transaction methods. The technology will also unravel a plethora of uncharted legal issues, including smart contracts, property ownership of virtual assets and privacy concerns for anonymous transactions. Legal systems and regulations will soon have to rise to the challenges presented by blockchain technology. In Australia, the fintech space is reacting immensely quickly to blockchain and given the interest from major banks, it is inevitable that more financial institutions and potentially law firms will examine the technology.
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