Goldman Sachs: Blockchain Tech Could Save Capital Markets $6 Billion a Year

Pete Rizzo
May 25, 2016 at 23:44 UTC
FEATURE

A new report from Goldman Sachs Investment Research projects that the implementation of blockchain technology could streamline the clearing and settlement of cash securities, saving capital markets $2bn in the US and $6bn globally on an annual basis.

The figures are supported by breakdowns of the specific market areas where Goldman Sachs sees the technology as valuable, as it projects up to $900m could be saved in reduced personnel and $700m could be saved from IT systems improvements.

The report indicated that this projection is further limited to cash securities – specifically, equities, repo and leveraged loans – and that the savings could be greater. For example, Goldman Sachs foresees applications of the technology eliminating significant additional costs across the foreign exchange (FX), commodities and OTC derivatives markets.

Such estimates were part of a more than 80-page report issued by the multinational investment bank, which also provided estimates for the potential cost savings that could be reaped by organizations who use alternative implementations of the technology.

For example, it sees the use of blockchain-based identity management as creating up to $9bn in cost savings through 2020 in the peer-to-peer lodging industry by enabling the guests and hosts necessary to such business models to better manage disputes.

Elsewhere, the report examined the blockchain’s potential role in US energy markets, anti-money laundering (AML) and know-your-customer (KYC) compliance and in underwriting title insurance.

In addition to those three industries, the authors indicate that a $2.5bn to $7bn annual market could be developed by incumbents or innovators who help independent energy companies reach new markets. In compliance, it sees blockchain playing a role in reducing suspicious transactions, generating between $3bn and $5bn in cost savings. Finally, title insurance would see between $2bn and $4bn in savings through reductions in errors and manual processes.

However, most notably, the report called for a broadening in how blockchain technology should be characterized as a business opportunity, arguing that prior public statements on its potential have been perhaps too narrowly defined.

The report’s authors state:

"A key takeaway across these applications is that blockchain is not just about disintermediating the middleman. In some cases, blockchain could disrupt markets and existing participants, while in others, it promises to help drive cost savings by reducing labor-intensive processes and eliminating duplicate effort."

Overall, the report is the latest sign that Goldman Sachs is watching the industry closely, a development that follows public statements as well as select investments in startups.

To date, Goldman Sachs has participated in a $60m funding round for Digital Asset Holdings, and a $50m fundraising for blockchain-based payments startup Circle.

Cross-industry benefits

Following on its main theme, Goldman Sachs elaborated on areas where it believes blockchain technology can be best applied, again extending this definition beyond one focused on its ability to potentially reduce or replace certain market participants.

The researchers voiced their belief that the blockchain is ideally suited for Internet of Things (IoT) transactions, reducing fraud and corruption, increasing transparency, and efficiency in transactions involving multiple parties.

The report also built on the specific business use cases it identified as being beneficial by outlining how existing companies might leverage blockchain technologies in different ways. For example, the authors highlighted how blockchain technology may create new markets, such as enabling sharing economy startups including AirBnB and HomeAway to better manage the reputation of users.

In contrast, it sees the utilities market as one that could be "redistributed" with new startups helping to decentralize the power market by connecting local power generators with the ability to better distribute what they generate in real-time markets.

Still, Goldman Sachs sees the biggest potential in blockchain tech’s ability to streamline existing business processes, citing real estate title insurance, cash securities and anti-money laundering (AML) compliance as areas where the blockchain would create new efficiencies for incumbents.

Bitcoin praise

Notably, the report was keen to praise the public bitcoin blockchain as one of the “most appealing” and “novel” features of the new kinds of distributed database architecture the blockchain enables.

However, the researchers project that high-value commercial transactions will mostly be conducted in private distributed ledger environments where "trust is already established among participants" and they "desire transaction privacy".

"We believe that the vast majority of commercial blockchain applications – particularly in capital markets – are likely to use private or permissioned blockchains," the report reads.

The report also included an overview of both bitcoin and more general blockchain startups, providing an overview of their business models. However, which versions of the technology would best apply to the examples discusses was not elaborated on by the report.

Potential roadblocks

Still, the report argued that four significant challenges would need to be overcome in order for blockchain technology to enable cost savings and revenue opportunities.

These included standards, commercial conflicts and business process differences, privacy and speed and performance.

In the latter case, for example, Goldman Sachs indicated it believes it remains to be seen whether blockchain technology would be appropriate for "high-speed, high-volume applications". Despite claims from ecosystem’s innovators that have boasted about progress in this area, the report said that whether these technologies could follow through "remains a question" with no immediate answer.

The amount of privacy provided in distributed ledger environments related to commercial transactions was also raised as a point of concern, but the report continued this criticism one step further, noting users of blockchain-based platforms could become concerned about how their distributed ledger-based data is managed.

Goldman Sachs further reiterated recently raised issues about the ability of existing business processes to adapt to distributed ledger environments, framing existing industries as needing to be in the position to adapt to leverage its potential benefits.

The report warns:

"In many ways, a blockchain database is only as good as the data and business process that underlie it. Failure to reach a consensus among counterparties because of business process or commercial conflicts could significantly slow or even halt blockchain’s adoption."

Profiles in Innovation - May 24, 2016 (1)


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