Beyond Coins: Financial Enterprises put Blockchain through its Paces

Cryptocurrency evangelists make it sound as if blockchain will overturn the entire financial industry. The central banking system will be rendered obsolete, along with our traditional systems of voting, online purchases, and even identity verification. On the other hand, there is the push-back against the hype that Bitcoin’s meteoric price rise has caused. Some observers have held that it’s not just the press around coins that’s a problem; the underlying technology, blockchain, is problematic as well, and that distributed ledger technology is useless at best.

Between the evangelists and the old guard, who is right? Maybe neither, but there is money being poured into blockchain projects by some world-leading companies. These are early days for blockchain technology, and separating the back-page core technology from the various headline-grabbing coins is a difficult task. We can help.

Consider these facts:

• Many of the projects are still in the pilot phase (e.g., Nasdaq, Visa, Mastercard, Depository Trust & Clearing Corp (DTCC)).
• Most use cases are in the business-to-business arena, where processes can benefit from standardization among the various participants. These projects are often private blockchains, however, which raises the question about what fundamentally defines blockchain technology.
• Applications currently focus on three main areas: clearing and settlement, cross-border payments and proxy voting.

Let’s take a look at those areas.

Clearing and settlement:

Bank of New York (BNY) Melon is the only bank thus far to create a distributed ledger technology for clearing transactions. It is called BDS 360 and has been operational since 2016. While BNY Melon has embraced blockchain technology, BDS 360 is not a complete overhaul of its clearing system. Rather, BNY Melon created BDS 360 as a way of backing up its data, with an eye to boosting resiliency. The blockchain takes a snapshot of transactions every ten minutes, providing a record in case of a catastrophic event.

Nasdaq has also been working on applications in this area. One of its early blockchain projects was Nasdaq Linq, which it developed in partnership with the San Francisco based startup Chain as a way of clearing private securities.

Cross-border payments:

These types of payments have traditionally been cumbersome and opaque, as funds sometimes pass through a series of middlemen on their way to the ultimate recipient. Visa’s and Mastercard’s blockchain-supported system seek to tackle these issues by recording transactions on a permissioned blockchain and sending them from the bank of origin directly to the recipient bank. The payments, however, are still processed through the Visa and Mastercard network. As in the case on BNY Melon, blockchain technology is not completely replacing the existing systems used by Visa and Mastercard, but rather enhancing them.

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Proxy voting:

In February 2016 Nasdaq announced a project that offers a blockchain-based-e-voting service to shareholders of companies listed on Nasdaq’s Tallinn Stock Exchange in Estonia. About a year later, Broadridge, JPMorgan (NYSE:JPM), Northern Trust (NASDAQ:NTRS) and Banco Santander (MC:SAN) announced that they had separately completed a pilot using blockchain to enhance proxy vote transparency.

Proxy voting seems like a process well-suited to moving to blockchain, since some companies conducting proxy votes still use paper ballots, and their shareholders might be in diverse locations. Blockchain provides a secure, transparent way of tallying results anonymously, and many of its proponents believe it could vastly improve voting in political elections as well.

Even if it doesn’t turn the world upside down or make headline news, Blockchain is unquestionably innovative and has real-world applications. The lasting impacts of its disruptions might be greater than the technology itself. Specifically, it has the potential to transform the standardization and modernization of processes across financial institutions and the growing acceptance of distributed systems.