Ten years after the global financial crisis, dark clouds are threatening to descend once more. Could the global economy survive another major bank default?
To prevent another financial storm, the European Union has taken action by cracking open the highly-guarded banking industry to competition.
At the start of this year the banking industry as a whole has been given notice: banks within the European Union have been ordered by the Competition and Markets Authority (CMA) to open their vaults to grant customers access to their loot.
This means banks must allow customers ownership of their financial data: they can then share this with other banks and regulated financial businesses to shop around for a better deal – such as getting a cheaper overdraft.
The UK’s competition watchdog says this new Open Banking regime will revolutionise people’s financial lives.
In the new concept of Open Banking, anything from customer transaction history and product information to branch locations are now owned by the customer, not the bank.
And if data is the new oil then entrepreneurs and potential disruptors of the banks have struck gold.
This access to financial data together with the emergence of blockchain technology, which can be described as an ever increasing group of linked records, could be the catalyst for a revolution in the banking sector.
“Accenture has estimated that some major investment banks could make a whopping $10 billion in efficiency savings by utilising blockchain technology.
“In current systems there needs to be careful checks and balances of huge amounts of data that can prove time consuming for investment banks and remain open to some degree of error,” explains Thomas Levene, Founder of Best Blockchain Solutions Consultancy.
However, blockchain technology enables less reliance on human intermediaries and thus offers a clearer path to more trusted efficiency goals and savings.
“So, it’s not surprising then that investment banks, including Goldman Sachs and JP Morgan, are getting on board with blockchain. These two apparently completed a test in the $2.8 trillion equity swaps market with a 100% success rate using blockchain technology.”
And with decentralisation and disruption of exchanges also on the cards, these market players are moving quickly to jump aboard the blockchain revolution.
“In terms of clearing and settlements, the Australian Stock exchange is replacing its registry, settlement and clearing system with blockchain technology in order to cut costs for its clients. This trend is set to continue with stock exchanges across the globe,” says Levene.
Blockchain could help investment banks make international money transfers cheaper and faster for all parties concerned.
“The technology has still some way to go in proving itself in terms of speed and scaling qualities, but there’s no doubt that once these challenges have been overcome it’s a green light for blockchain and investment banks and international settlements too,” Levene says.
Investment banks may also begin to use blockchain decentralised prediction market platforms such as Augur, Cindicator and Numarie, which could prove to be better than current systems.
In addition, Globitex is making it accessible to buy commodities with crypto assets on their platform.
But with all these new developments it’s worth bearing in mind that the relationship consumers have with money isn’t the same as the one they have with technology.
The scenes of people queuing outside the collapsed British Bank, Northern Rock, in 2007 are a vivid reminder of that.
A recent survey by UK Finance has cast a shadow of doubt onto how much consumers will embrace this technological revolution: only 56% of people surveyed are using mobile or online banking.
It seems that a significant part of the population is either still unsure of the internet or simply prefers traditional banking. The news this week that Coinrail, a cryptocurrency exchange in South Korea, has been hacked, may add to doubts over whether the blockchain can be trusted with personal finances.
Nevertheless, a new wave of startup companies proposing to make investing and trading easier, remain undeterred. At the heart of this road to decentralisation is the prospect that millions if not billions of dollars will be saved by businesses in the process. And a penny saved is a penny earned.
To adapt or die is the eternal challenge for business leaders: established banks are working overtime in a bid to stay one step ahead of new market entrants.
Levene explains; “the other side of the crypto coin is that while existing investment houses need to adapt and adopt, they could very well be replaced, at least in part by new blockchain start ups that have the potential to ‘eat their lunch’. And it’s a big lunch. In the 2017 fiscal year Goldman Sachs amassed $32 billion.”
“Currently for large issuers, it’s a given that you simply have to use investment banks. But assuming regulatory compliance, it doesn’t need to be this way.”
We are entering an unprecedented point in the history of financial markets where largescale disruption of investment banks is on the horizon.
tZero has entered the scene as the first regulated securities token exchange.
“Companies like tZero, whose Chief Executive Officer (CEO) is the founder of Overstock, are aimed at eating some JP Morgan lunch. They are creating a distributed ledger platform for capital markets. Some have called this offering, whose ICO finishes at the end of June 2018, WallStreet 2.0, as they aim to fuse traditional finance with the benefits of a token crypto economy,” says Levene.
Another player in this sector is Polymath.
Polymath claim they will be the future of finance, tokens, securities and even Wall Street. The elimination of middle men coupled with unlimited access to the market, day or night and even at weekends, is set to be a revolution in itself. Polymath have already raised $59 million dollars in a token sale in February 2018.
“Polymath aim to take the token economy one step further by matching real world assets to the token economy.
“Trillions of dollars are set to go on the blockchain,” Koverrk from Polymath says, because he thinks tokens are a superior form of ownership than stocks, shares and units of these.
“Compliance can be fully automated, he thinks, where dividends and voting are done on the blockchain automatically and without expensive backroom office administration staff, making it a win win,” explains Levene.
These investment bank disruptors are about to launch ICOs:
A digital asset exchange, set to launch an ICO in July. They propose to give investors unfettered access to the markets from anywhere in the world.
Due to launch an ICO next month, Ingot Coin will create an ecosystem to provide a link between the traditional market and the crypto one.
Using the blockchain, Hedger Tech proposes to create an investment management ecosystem once they have completed their ICO in July.
Products available to investors will include hedge funds, futures, options, loans and insurance.
Artificial Intelligence Exchange
Launching fully later this year, AIX promises to be a trading platform across all global markets.
In response to the disruption at hand, J.P Morgan, Goldman Sachs, and Santander are all stepping up efforts to hook up with the blockchain:
J.P. Morgan have established a Blockchain Centre of Excellence to explore business use cases within the company.
In April, Santander joined the blockchain with the launch of a new foreign exchange payment system, One Pay FX.
Last month, Goldman Sachs followed suit with plans to setup a trading operation in Bitcoin.
In May, the Tel Aviv Stock Exchange has joined forces with management consultancy firm Accenture to create a platform for securities lending.
“The current system is ripe for disruption, says Levene, “time consuming and expensive venture capital funded investment bank models cannot compete with streamlined token based funding efforts that are already having an impact on traditional investment banks’ bottom line.”
“Of course, there are regulations that need to be adhered to under bodies such as the SEC in the US.
“But, having said that, the future potential of the blockchain to at least disrupt some if not all of these financial service activities within investment banks, is immense.
The token economy, where companies have tokenised their ecosystems, is not as far off as you think.”