Blockchain begins to shift from hype to practical application

Peter Hiom, deputy chief executive of the Australian Securities Exchange, announced at this year’s Securities Industry Conference that his speech would touch on blockchain. “It’s everyone’s favourite topic,” he joked, “or the new black tech.”

The technology behind Bitcoin has been discussed a lot in the financial world, but so far, most of the discussion has fallen into two categories: popular science about what the technology is and the role it could play in different areas of banking and markets, and the hype that some of the blockchain's most ardent supporters and early investors believe it could bring about major changes.

Now, startups and existing financial market giants are beginning to test different uses of blockchain technology. The Australian Stock Exchange (ASX) has taken some of the boldest blockchain experiments. This year, it announced a partnership with Digital Asset Holdings (DAH) to move Australia's stock clearing and settlement system to the blockchain.

“Today, blockchain is less about a product or technology, it’s more about a journey or process that companies are going through and understanding,” said Matt Roszak, co-founder of Bloq. “This is very similar to what we saw with the internet 20 years ago, or cloud computing 10 years ago.”

Blockchain is an electronic ledger of transactions, with verification of transactions recorded in "blocks". This ledger is distributed across computer nodes on the network and protected by encryption technology. Some say blockchain is a threat to banks and exchanges because it removes the need for a central authority, thereby achieving disintermediation.

But others see blockchain as an opportunity for existing financial institutions to save billions of dollars by eliminating inefficiencies and the need for trade insurance.

An analysis published last year by Santander InnoVentures, Oliver Wyman and Anthemis Group estimated that distributed ledger technology could reduce banks’ infrastructure costs (including cross-border payments, securities trading and regulatory compliance) by $15 billion to $20 billion per year by 2022.

“Every 10 years or so, there is a huge change in technology in the market,” said Peter Randall, CEO of UK startup Setl. “Now is the time to use 21st century technology in the post-trade space. Distributed ledger technology is an appropriate and suitable technology.”

Nasdaq is another exchange that has used blockchain technology, which it has used in its private trading markets in the United States and is testing it in the Estonian market.

DTCC, a U.S. clearing and settlement services provider, has used blockchain to store credit default swap trading information. Meanwhile, Euroclear, one of the world’s largest clearing companies, has partnered with startup Paxos to develop a new settlement system for the London market.

“Over the next 12 to 18 months, we’re going to see a lot of different solutions to different problems,” said Mark Smith, CEO of blockchain startup Symbiont.

Last month, distributed ledger technology firm R3, Credit Suisse, Symbiont and others announced a project to determine how blockchain could improve the syndicated loan market.

Ray Valdes, research vice president at IT consultant Gartner, said that based on his analysis of previous hype for emerging technologies, blockchain hype is at or just before the market peak, and he expects that hype will soon turn to disillusionment. "Starting early next year, we're going to see in the mainstream media that this blockchain thing is not a very good thing," he said.

“Then, as people understand the technology, they will figure out how it can be used effectively. That process could take several years.”