Blockchain Revolution

THE GOLDEN EIGHT
Blockchain Transformations of Financial Services
FUNCTION
BLOCKCHAIN IMPACT
STAKEHOLDER
1. Authenticating Identity and Value
Verifiable and robust identities,
cryptographically secured
Rating agencies, consumer data analytics,
marketing, retail banking, wholesale
banking, payment card networks,
regulators
2. Moving Value—make a payment,
transfer money, and purchase goods
Transfer of value in very large and very small
increments without intermediary will
Retail banking, wholesale banking,
payment card networks, money transfer

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and services
dramatically reduce cost and speed of payments services, telecommunications, regulators
3. Storing Value—currencies,
commodities, and financial assets
are stores of value. Safety deposit
box, a savings account, or a
checking account. Money market
funds or Treasury bills
Payment mechanism combined with a reliable
and safe store of value reduces need for typical
financial services; bank savings and checking
accounts will become obsolete
Retail banking, brokerages, investment
banking, asset management,
telecommunications, regulators
4. Lending Value—credit card debt,
mortgages, corporate bonds,
municipal bonds, government
bonds, asset-backed securities, and
other forms of credit
Debt can be issued, traded, and settled on the
blockchain; increases efficiency, reduces
friction, improves systemic risk. Consumers
can use reputation to access loans from peers;
significant for the world’s unbanked and for
entrepreneurs
Wholesale, commercial, and retail
banking, public finance (i.e., government
finance), microlending, crowdfunding,
regulators, credit rating agencies, credit
score software companies
5. Exchanging Value—speculating,
hedging, and arbitraging. Matching
orders, clearing trades, collateral
management and valuation,
settlement and custody
Blockchain takes settlement times on all
transactions from days and weeks to minutes
and seconds. This speed and efficiency also
creates opportunities for unbanked and
underbanked to participate in wealth creation
Investment, wholesale banking, foreign
exchange traders, hedge funds, pension
funds, retail brokerage, clearinghouses,
stock, futures, commodities exchanges;
commodities brokerages, central banks,
regulators
6. Funding and Investing in an
Asset, Company, Start-up—capital
appreciation, dividends, interest,
rents, or some combination
New models for peer-to-peer financing,
recording of corporate actions such as
dividends paid automatically through smart
contracts. Titles registry to automate claims to
rental income and other forms of yield
Investment banking, venture capital, legal,
audit, property management, stock
exchanges, crowdfunding, regulators
7. Insuring Value and Managing
Risk—protect assets, homes, lives,
health, business property, and
business practices, derivative
products
Using reputational systems, insurers will better
estimate actuarial risk, creating decentralized
markets for insurance. More transparent
derivatives
Insurance, risk management, wholesale
banking, brokerage, clearinghouses,
regulators
8. Accounting for Value—new
corporate governance
Distributed ledger will make audit and financial
reporting real time, responsive, and transparent,
will dramatically improve capacity of
regulators to scrutinize financial actions within
a corporation
Audit, asset management, shareholder
watchdogs, regulators
blockchain would transform her business as the Internet transformed other industries:
“I would take it about as seriously as you should have taken the concept of the
Internet in the 1990s. It’s a big deal and it is going to change the way our financial
world operates.”
18
Masters had dismissed many of the early tales of bitcoin, exploited by drug
dealers, harnessed by gamblers, and hailed by libertarians as creating a new world
order. That changed in late 2014. Masters told us, “I had an ‘aha moment’ where I
began to appreciate the potential implications of the technology for the world that I
knew well. Whilst the cryptocurrency application of the distributed ledgers
technology was interesting and had implications for payments, the underlying
database technology itself had far broader implications.”
19
According to Masters,
blockchain could reduce inefficiencies and costs “by allowing multiple parties to rely
on the same information rather than duplicating and replicating it and having to

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reconcile it.” As a mechanism for shared, decentralized, replicated transaction
records, blockchain is the “golden source,” she says.
20
“Bear in mind that financial services infrastructures have not evolved in decades.
The front end has evolved but not the back end,” says Masters. “It’s been an arms race
in technology investment oriented toward speeding up transaction execution so that,
nowadays, competitive advantages are measured in fractions of nanoseconds. The
irony is that the posttrade infrastructure hasn’t really evolved at all.” It still takes
“days and in some cases weeks of delay to do the posttrade processing that goes into
actually settling financial transactions and keeping record of them.”
21
Masters is not alone in her enthusiasm for blockchain technology. NASDAQ CEO
Bob Greifeld said, “I am a big believer in the ability of blockchain technology to
effect fundamental change in the infrastructure of the financial service industry.”
22
Greifeld is integrating blockchain’s distributed ledger technology into NASDAQ’s
private markets platform through a platform called NASDAQ Linq. Exchanges are
centralized marketplaces for securities and they are also ripe for disruption. On
January 1, 2016, NASDAQ Linq completed its first trade on blockchain. According to
Blockstream’s Hill, one of the largest asset managers in the world “has more people
dedicated to its blockchain innovation group than we have in our entire company.”
Hill’s company has raised over $75 million and employs more than twenty people.
“These guys are serious about making sure that they understand how they can use the
technology to change how they do business.”
23
The NYSE, Goldman Sachs,
Santander, Deloitte, RBC, Barclays, UBS, and virtually every major financial firm
globally have taken a similar serious interest. In 2015, Wall Street’s opinion of
blockchain technology became universally positive: in one study, 94 percent of
respondents said blockchain could play an important role in finance.
24
Although many other applications pique the interest of Wall Street, what interests
financial executives everywhere is the notion of using the blockchain to process any
trade securely from beginning to end, which could dramatically lower costs, increase
speed and efficiency, and mitigate risk in their businesses. Masters said, “The entire
life cycle of a trade including its execution, the netting of multiple trades against each
other, the reconciliation of who did what with whom and whether they agree, can
occur at the trade entry level, much earlier in the stack of process, than occurs in the
mainstream financial market.”
25
Greifeld put it this way: “We currently settle trades
‘T+3’ (that is, three days). Why not settle in five to ten minutes?”
26
Wall Street trades in risk, and this technology can materially reduce counterparty
risk, settlement risk, and thus systemic risk across the system. Jesse McWaters,
financial innovation lead at the World Economic Forum, told us, “The most exciting
thing about distributed ledger technology is how traceability can improve systemic

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stability.” He believes these “new tools allow regulators to use a lighter touch.”
27
The
blockchain’s public nature—its transparency, its searchability—plus its automated
settlement and immutable time stamps, allow regulators to see what’s happening, even
set up alerts so that they don’t miss anything.