Home Slider Wall Street 2.0: How Blockchain Is Revolutionizing Finance

Wall Street 2.0: How Blockchain Is Revolutionizing Finance

by internationalbanker

By Tim M. Zagar, Co-founder and CEO, ICONOMI





The financial industry is buzzing about how blockchain will change the world, but many don’t realize that the transformation has already begun. Much as Uber revolutionized the private-transportation industry and Airbnb the travel industry, blockchain is revolutionizing finance. Digital assets are reinventing traditional financial and social structures while connecting the world’s billions of “unbanked” individuals with a new global economy. This new technology combines the peer-to-peer approach to computing developed in Silicon Valley with the traditional money-management techniques of Wall Street.

The unprecedented openness and accessibility of blockchain technology are extremely attractive to “digital natives”, Millennials who grew up during or after the explosion of digital technology. These “re-wired investors” want to play a more active role in the services they buy, and banking and fund management are no exceptions. The Internet-based development of cryptocurrencies and the resulting huge store of publicly available information allow these do-it-yourself-oriented investors to be much more personally involved than they can be when working with traditional fund managers. This self-determination—combined, of course, with expert investment advice—is what this generation craves; and if the world of finance wants to thrive, it should give it to them. Blockchain makes this more achievable than ever before.

Europe: a native blockchain environment

If the financial industry is going to get ahead of the tech curve, it must do so in a considered and collaborative way. Europe is a frontrunner in the movement and is quickly becoming the main hub for blockchain start-ups and innovation. Thanks to a favorable legal framework, regions with high concentrations of blockchain firms, such as Slovenia and the “Crypto Valley” in Switzerland, are emerging all over the continent. Legislators should work closely with blockchain pioneers to avoid creating technological stagnation and to ensure the technology continues to be innovated.

With the Fourth Industrial Revolution—the Blockchain Revolution—the old continent is once again becoming the cradle of development. A decade ago, if you wanted to succeed in technology, you had to live and work in the heart of Silicon Valley, the indisputable tech mecca of the world. To be successful in finance, you had to be in the brain of the financial industry, on Wall Street. With blockchain, successful companies can emerge from anywhere: on the slopes of the Himalayas, in the desert, in Slovenia. With blockchain, we are all equalized.

In its in-depth analyses, the European Parliamentary Research Service stated, “Blockchains are a remarkably transparent and decentralized way of recording lists of transactions.” A pillar of the Old World, the European regulatory framework is ideal for accelerating this explosion of distributed innovation. The European Union’s (EU’s) passporting system allows cross-border cooperation and trade with a minimum of regulatory burden. This is vital for the growth of such a new technology, for which the key maxim is “innovate first, regulate second”.

Europe contains several examples of governments not just tolerating but actively supporting and fostering the use of blockchain technology. Estonia is using custom blockchain software to secure its citizens’ medical records, create an e-residency program and implement an e-voting system. Switzerland has firmly established itself as a major blockchain hub: in addition to hosting the headquarters of the Ethereum Foundation, four of the five largest token sales took place there. Slovenia has also emerged as a standout in the EU blockchain world, hosting successful blockchain companies such as Cofound.it and others, which are working closely with the Slovenian government to develop a sound regulatory framework. Just 26 years old, Slovenia is itself a member of the group driving blockchain toward success: Millennials.

Reaching mass adoption

All signs point to blockchain becoming mainstream. Since January 2015, the total market capitalization of cryptocurrencies has increased more than 4,000 percent. All signs point toward the continuation of this trajectory toward growth and mass adoption. An explosion of digital-asset exchanges has massively increased liquidity. Elite firms such as Goldman Sachs are already investigating setting up departments to take advantage of this new asset class. Governments are also taking notice: India and Sweden are considering creating national cryptocurrencies, and Japan has officially recognized bitcoin as legal tender. Blockchain has also started making inroads into the traditional finance world: CME Group recently announced plans to release a bitcoin futures product by the end of the year. In the future, many successful blockchain companies will likely provide token-holders with equity-like rights and seek to comply with standard securities regulations.

Tokenization: a new paradigm of ownership

Increasingly, access is becoming more important than ownership, as demonstrated by the massive growth of the sharing economy. For many, companies such as Uber and Airbnb are making traditional ownership obsolete. Blockchain allows for a new type of distributed ownership through the “tokenization” of assets. A tokenized asset is one that’s history of ownership is validated entirely on a blockchain. For example, the value of “dead capital”—houses, cars and other assets the owners of which have no legal title—is estimated by some to be in the range of $20 trillion. This also results in disputes over land and property ownership, especially in the developing world. Implemented successfully, this problem could be easily solved by putting land and property deeds on the blockchain, making verifying the legitimate owner of a property easy, secure and extremely reliable.

In the future, virtually all assets will be tokenized. While objects that can be represented digitally provide the most obvious examples, many believe the tokenization of physical assets is not far away. Steps are already being made in this direction, with companies building functionality for tokenizing gold and creating blockchain-supported licensing for music, video and even real estate. Blockchain is beginning to “unbundle ownership”. Toyota is using the technology to develop a “trustless” alternative to Uber, and some believe a blockchain-based Airbnb isn’t far behind.

Major technology providers to financial markets have already entered the ecosystem. Fortune 500 companies, large banks and major insurance firms are using blockchain to streamline their business operations, eliminate counterparty risk and build innovative financial software unimaginable before blockchain. Over a hundred banks are collaborating with SWIFT on a project to make cross-border payments more efficient. AXA, the second largest insurance company in the world by revenue, recently announced a project to fully automate flight-insurance payouts. Dozens of major banks and Fortune 500 companies, including JPMorgan Chase, Credit Suisse, Intel, British Petroleum and Cisco, have joined the Enterprise Ethereum Alliance, an organization seeking to facilitate connections between traditional business and the blockchain world.

Because of the relatively early stage of the technology, it is easy to forget that blockchain is already actively saving money for companies in the financial industry. By lowering infrastructure costs, Santander believes banks utilizing blockchain will save $15–20 billion a year by 2020. Furthermore, the concept of “anytime, anywhere” banking, with its focus on speed and optimal client experience, has become essential to facilitating commerce. As markets stabilize and the blockchain ecosystem becomes more widely known and understood, an increasing number of investment firms are allocating a percentage of their portfolios for digital assets.

In essence, blockchain is opening up world markets, much as the Internet revolutionized open access to information. The artificial barriers currently in place—both geographical and financial—will be dissolved. The potential is limitless. The ability to access any service, physical asset or tool you need, when and where you need it, will prove transformative and more egalitarian for both the consumer and the entrepreneur.

Blockchain technology offers a once-in-a-generation opportunity for deep financial innovation. Only those who recognize this potential will help build the future of financial technology and capitalize on this unprecedented opportunity for value creation.

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