Standard & Poor's: The mass adoption of blockchain technology could change the ratings of financial institutions

Global ratings agency Standard & Poor’s (S&P) may consider changing its ratings of large financial institutions if blockchain use becomes widespread and starts to impact current business models.

In a report released on Wednesday, Standard & Poor's (S&P) said it believes rising investment in blockchain technology is indicative of a 'change' in the financial industry.

Blockchain is like a giant decentralized ledger that records every transaction and stores that information on a global network so it cannot be altered. Banks see the technology as being useful for everything from money transfers to securities trading, cutting costs and creating a tamper-proof record of transactions without the need for a third party.

S&P said blockchain, a technology that can streamline back-office operations, reduce clearing and settlement times, facilitate payments and generate new revenue streams for financial institutions such as banks and asset managers.

But don’t expect blockchain to gain widespread adoption anytime soon.

S&P said:

“While blockchain technology has the potential to be used for niche applications, it is still a long way from broad market adoption as it requires consensus among market participants and, in some cases, regulatory approval.”

“So, in the short term or even in the long term, we don’t see blockchain as a ratings enabler. But we think that depending on how this technology is ultimately applied and whether it can take over the financial industry, this technology can have a substantial impact on the business model of various institutions.”

S&P said the technology could give companies a competitive advantage and even begin to reduce the 'relevance' of certain business models. In this context, S&P said they may 'consider changes to ratings' if blockchain adoption accelerates faster than they expect, which would have broad implications for financial institutions' operating models.

So far, many large banks have been working with a company called R3 to test the potential use of blockchain. On Monday, Wells Fargo and Commonwealth Bank of Australia demonstrated the first real-world use case of blockchain, processing and executing a batch of cotton transactions from the United States to China.