SWIFT releases research report "Blockchain's Impact and Potential on the Entire Process of Securities Trading"

SWIFT Institute recently investigated the practical application of blockchain (or common distributed ledger) technology in the securities market and released a report entitled "The Impact and Potential of Blockchain on the Whole Process of Securities Trading". Relevant personnel from 75 organizations engaged in technology and post-trade processing were interviewed and held focus group meetings. The information they provided became the basis for writing the report. The research report written by Alistair Milne of the School of Business and Economics of Loughborough University in the UK and Michael Mainelli of Z/Yen Group found that although blockchain is expected to bring innovation to the industry, to fully realize these benefits, it requires board-level recognition, a lot of time and resources, and active support from regulators to reform business processes, while the short-term returns are relatively small.

A common distributed ledger allows people to share agreed and audited data, with cryptographic controls for access and update rights. The application of blockchain technology has the potential to significantly reduce the post-trade processing costs of global securities transactions. Currently, this cost is at least $40 billion per year. It can also significantly reduce the costs and risks of other financial services activities. However, there are currently unrealistic expectations about the extent to which the technology itself can address the need for coordinated changes in business processes within and between companies. The main conclusion of the study is that the full application of blockchain will require a significant reengineering of business processes for multiple securities market companies.

Mainelli explained, “The financial services industry and the media are hyping the promise of a shared distributed ledger that will dramatically reduce costs and risks. Some are also suggesting that the technology will revolutionize how financial markets work. However, a deeper understanding of the technology lags far behind the hype from practitioners, policymakers and industry commentators. Blockchain technology appears to have the potential to deliver significant benefits to the industry, but few are able to articulate exactly how or why.”

As part of the study, the researchers investigated three hypotheses:

1. The appropriate level of access required for a common distributed ledger used by global securities markets;

2. Should changes be made item by item or implemented at the industry level?

3. Do the benefits of the technology require significant changes to existing business processes?

In practice, some of the benefits of a common distributed ledger can be achieved using relatively simpler methods, such as recording data in a shared bilateral ledger when a transaction is executed, thereby reducing the large costs of reconciliation between the two parties. Other blockchain-related goals, such as shortening the settlement cycle to near real time or using so-called "smart contracts" to eliminate manual processing, do not require common distributed ledger technology at all.

Milne added: “The challenge of using a common distributed ledger in securities markets is not only proving the feasibility of the technology, but also achieving the necessary industry coordination and reengineering the business processes of securities firms. The adoption of a blockchain model presents an opportunity for the industry to coordinate business processes and potentially address long-neglected inefficiencies in post-trade processing. However, in order to fully realize the benefits of blockchain, it will require buy-side and sell-side and regulator acceptance.”