Blockchain is the software that is behind bitcoin, the virtual currency.
Financial companies are scrambling to use the technology to speed up transactions processing and reduce their back-office expenses. While bitcoin has been a very controversial innovation, especially since it was linked with illegal activity, why not apply the same algorithm to legit currencies?
Instead of depositing money at a bank, why can’t we keep it in our blockchain virtual account in any currency we choose? It may be a radical idea, but it’s an obvious evolution of the bitcoin concept.
Jackie and I have been writing about the disruptive impact of technology on all industries. It seems to us that the FinTech Revolution has started and could be especially revolutionary. If we all use bitcurrencies, what will that do to the effectiveness of monetary policy? Since we aren’t big fans of central banks (run by central monetary planners), we’re naturally wondering: Might it make them extinct? We don’t have the answers — just thinking out loud for now.
Here are a few of the latest developments:
(1) Roughly two weeks ago, JP Morgan Chase’s CEO Jamie Dimon appeared on CNBC in front of the snow-covered pines of Davos and gave his stamp of approval to blockchain, the technology behind bitcoin that keeps track of transactions via the Internet. “The blockchain is a technology which we’ve been studying, and yes it’s real, it can probably reduce the cost of doing business. If it proves to be cheap and secure, it would be adopted for a whole bunch of stuff,” he said according to Barron’s 1/20 Tech blog by Tiernan Ray.
(2) Now JPMorgan has gone a step further. The bank has entered a “trial project” that will use blockchain to allow the bank to trade loans less expensively and with less hassle, the 1/31 FT reported. “The bank is collaborating with Digital Asset Holdings, the New York-based start-up run by Blythe Masters, the bank’s former head of commodities.”
If the project is successful, there’s hope that blockchain can be used to speed up the sale and settlement of other securities as well. Autonomous Research estimates that the global investment banks now spend about $50 billion per year on post-trade processes, and blockchain technology could reduce that figure by a third, according to the FT story.
“Ms. Masters noted that efforts to improve the speed of settlement led to ‘reduced capital requirements, lower operational costs and improved client experience,’” the FT reported. Digital Asset Holdings has received investments from JPMorgan, Citigroup, Deutsche Borse, and the Depository Trust & Clearing Corp. Goldman Sachs reportedly is in talks about funding the company as well.
(3) Digital Asset is just one of many shops developing blockchain technology. R3, a consortium of 42 investment banks, has been test-driving the technology in its lab. Eleven top investment banks used blockchain last month to execute mock trades with each other without the need for a centralized third party, Business Insider reported on 1/20. The 11 banks involved were Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit, and Wells Fargo.
We discussed Masters’ involvement with blockchain late last year as part of a look at how blockchain could prove disruptive, getting the intermediaries — and the expense — out of many different types of financial transactions, including trades and payments.
Looks like the future is approaching rapidly.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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