Moody's is predicting that blockchain tech will spark a transformation on the post-trade side of the securities business, but it argues that more developed markets may not play a prominent role in the near term.
The credit ratings service provider, famed for its economic analysis, published a new report today in which it maintains that industry titans are unlikely to be disrupted by blockchain tech – at least in the near to medium term.
Issued as part of a sector deep dive, the report examines the potential for blockchain across the life cycle of a securities trade, and offers a set of possible scenarios in which the technology and the legacy financial players might coexist.
Robard Williams, the report’s lead author, said that, while there is ample space for blockchain to thrive, barriers to entry posed by regulation and the sheer scale of incumbents ensure distributed ledger startups will more likely serve in complementary roles.
Williams told CoinDesk:
"We really don’t necessarily see today’s incumbents being displaced or disrupted in the first instance."
In the report, Williams highlights the back-end reconciliation and settlement processes that the agency believes are most ripe for blockchain solutions.
Further, his team outlines how as many as a dozen intermediaries – including buyers, sellers, brokers, exchanges and custodians – can be involved in processing securities transactions today, and how each party must manually reconcile its own ledger.
"A lot of the activity that goes on here is on the cost side, it’s not high value-add. So where a technology can come along to reduce inefficiencies, reduce manual input, reduce reconciliation – we really see the post-trade as a place where a lot of those benefits can accrue," he explained.
Risk and reward
Moody's sees blockchain as a means of managing counterparty and credit risk.
While certain intermediaries like clearing houses, custodians and depositories will likely see a drop in income should certain process be moved to a blockchain, Williams insisted that the new operating efficiencies created will be enough to compensate – provided that the firm is sufficiently forward-thinking.
"They'll need to have the financial wherewithal and 'vision' to implement and get on board,” he said. “You could see, potentially, a smaller firm being left behind, but as of today we think that this is really an enabling technology."
Still, in addition to universal questions of interoperability, scalability and the need for industry standards and governance, the analysts highlight several industry-specific dilemmas that must be solved, including the question of whether blockchain solutions can sufficiently compete with existing processes to justify the investment.
"It is uncertain whether blockchain solutions can manage high-volume, high-speed transaction flows," the report notes.
The report goes on to lay out three possible scenarios for how blockchain adoption in the post-trade space could take shape – ranging from the current financial institutions leading the way to hostile takeover and disruption.
A middle-ground scenario is also posed in which a single incumbent pushes the needle in conjunction with startups.
While this scenario is deemed unlikely in the medium term, at least in some major markets, it could unfold in markets with more consolidated capital markets, the report projects.
This scenario is perhaps most likely in developed markets such as Australia, Brazil, Canada, Hong Kong, Japan, Korea and Singapore, which it argued has fewer intermediaries involved in processes today.
The way forward could be more complex elsewhere, the report argues, concluding:
"In markets with many more intermediaries, such as the EU, the UK and the US, more collaboration among firms will be required in order to realize the true benefit of blockchain technology."
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