The head of interest rate and credit models at Banca IMI, an investment banking and capital markets subsidiary of Intesa Sanpaolo, has penned a new paper on blockchain technology.
Dedicated to spotlighting "real business cases" for the technology, Massimo Morini's report argues that the lesson that should be learned from cryptocurrencies such as bitcoin is that traditional financial business model needs to be reformed, not just improved.
"One crucial misunderstanding here is the idea that blockchain technology can be exported to financial markets as they are to make them more efficient. This is meaningless; blockchain technology was created to change some trust-based business processes to make them less reliant on trust; without structural changes in this direction the best of blockchain technology is lost and just the inefficiencies are left."
Morini goes on to argue that the financial industry must now be prepared to use trust in a "totally different way" and to reimagine existing business processes.
Still, he acknowledges that its efficiencies are not needed in all markets, stating that the financial industry needs to emphasize use cases where risks are outweighed by the cost savings of having less reconciliation and faster settlement. Morini highlights over-the-counter derivatives as an instance of such a market, and analyzes both current and theoretical approaches to its design.
Morini goes on to conclude that new business models based on distributed accounting and blockchain-based smart contracts will require additional regulatory clarity to scale, and that digital currencies or assets will need to be convertible with central bank accounts or at financial institutions.
However, he suggested such changes could come quickly, concluding:
"Legal and regulatory status could come earlier than expected if regulators see advantages in an architecture which is more transparent and creates less risk than most of the current solutions."
For more details, read the full report here.
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