This article appears in the March 30, 2017 issue of Forbes.
As Wall Street considers how blockchain can revolutionize the world of finance, it reminds me of video games. Back in 1972, Atari’s arcade game Pong launched the video game industry. Pong’s technology was crude—players controlled little bars of light to hit a digital ball back and forth. When it comes to some things on Wall Street, such as taking three-days to settle a trade, it’s as if we’re still playing Pong.
Now, imagine if gaming never advanced past 1972 and then one day someone arrived with Pokémon Go, taking us from the world’s most boring digital tennis match to using our phones to hunt for Pokémon in the real world, employing a mix of augmented reality, GPS technology and advanced graphics. It would be fantastic, but no one would know how to play it. People would need to pause, talk to each other, figure out how to use the new devices, and learn to get the most out of the new technology together. That’s the promise of blockchain for Wall Street.
The distributed ledger technology can lead the financial industry to unexpected and interesting places, bringing us everything from instant trade settlements to better security, but to get there, we need to learn how to use it together. That’s why many Wall Street firms (including mine) are investing heavily to build early applications that will get the journey started.
Blockchain, the technology underpinning the digital currency bitcoin, will transform everything from proxies to stock exchanges to the trading of foreign currencies and commodities. Today, a central authority, such as a bank, exchange or clearing house, serves as the intermediary to transactions. Blockchain instead uses a computer network to enable secure transactions, making trading more streamlined, efficient, transparent and secure.
Placing Our Bet on Blockchain
A particularly strong feature of blockchain is the network effect—the more parties that participate, the greater the value of the network. We believe a place to prove the functionality of blockchain is with proxy voting because of Broadridge’s massive network. We manage 85% of North American proxy voting and over 50% everywhere else, sitting between 50,000 issuers, over 100 million investors, and thousands of financial institutions and intermediaries. This puts Broadridge in a strong position to deliver the benefits of blockchain and we are working with industry leaders to do so.
That’s why we recently made large technology acquisitions to build the first iteration of a blockchain platform for proxies to run alongside our current system. Just recently we announced an international effort with J.P. Morgan, Northern Trust and Banco Santander, having successfully completed a pilot test using blockchain at a shareholder annual general meeting to produce a “shadow” digital register of the proxy voting taking place in the traditional way. Blockchain brings three principal benefits to proxy voting—it increases efficiency by reducing the complexity of the reconciliation process; it enhances security via encryption; and it increases transparency around vote confirmation. For issuers, it will also create a digital agenda for meetings and can offer analytics after voting about such things as the different drivers of institutional and retail voting behavior.
Last March, a PwC survey found that 56% of people in financial services recognize the importance of blockchain, but 83% of those polled were only “moderately” familiar with the distributed ledger technology. Make no mistake, every executive leading a Wall Street company should assess how blockchain can impact their business. While there are many complexities and challenges that will need to be overcome, this is a once-in-a generation opportunity.
For those that learn about blockchain and embrace its promise, the opportunity is huge—it has the potential to speed up all transaction processing, from fund transfers to proxy voting. By 2025, blockchain could save eight of the world’s 10 largest investment banks between $8 to $12 billion annually, or about 30 percent of their infrastructure costs, according to a recent report by Accenture and McLagan. And, a new report by Bain and Broadridge concludes that using distributed ledged technology could save global financial markets up to $30 billion.
Credit Suisse is working on faster settlements of credit default swaps and syndicated bank loans and BNP Paribas and others are establishing innovation labs. Fintech startup Ripple is working with a group of banks, including UBS and Santander, on using blockchain for cross-border payments, and Euroclear has completed its first pilot trades using blockchain in the London bullion market. In Estonia, shareholders in the dozen or so firms on the Tallinn Stock Exchange who are part of Estonia’s e-residency program have successfully used the blockchain-based platform to vote securely online in shareholder meetings. Abu Dhabi, keen to attract fintech companies, has launched a blockchain system for shareholders of the 67 companies listed on the Abu Dhabi Securities Exchange to vote proxies. The State of Delaware, where more than half of all U.S. publicly traded companies are incorporated is working to maintain that leadership position by embracing blockchain. The state has launched an initiative that helps businesses to use blockchain to distribute and save contracts using technology developed by Symbiont.
There is a lot of excitement around blockchain and rightfully so. Innovation on Wall Street is not new and this is just the latest chapter in a long journey. Think about checks: We once wrote checks and mailed them, now we pay them online but it still takes time for funds to move. Blockchain will instantly debit and credit the relevant accounts. In proxies, past innovations include telephone voting, e-delivery, and electronic improvements enhancing governance. Hopefully two years from now, we can vote our proxy using blockchain too.
Like any advance, there may be some false starts and some shots that miss the target. But the opportunity is so great that no one should bet against the smartest people on Wall Street making blockchain work.
From Forbes.com, March 30, 2017 © 2017 Forbes. All rights reserved.