Risks and prizes: the future of blockchain finance | AllAboutAlpha: trends and analysis of alternative investment


A new article by Dave Dowsett and Heather Wied, both by Invesco, examines the blockchains and the way in which this new technology, just as it moves away from its original meaning as a characteristic of cryptocurrencies, is ready to transform finance.

Dowsett and Wied argue that the blockchain "offers the possibility to drastically redefine the transactions". Because the "structures and protocols" of capital transactions remain "largely inefficient", redefining them is a promise, not a threat.

Dowsett is the global leader in Invesco's strategy, innovation and scenario planning. Wied is an advanced business analyst. For them, what promises to blockchain is that it creates a ledger that is hosted by each participant, thus allowing all parties to independently verify the integrity of the transaction, creating what is sometimes called a data democracy. Invesco, the authors tell us, has already "participated in experiments to compensate for post-trade settlements that have validated the concept using gold bars and equity securities". Continue to study the problems of scaling and implementation.

Dowsett and Wied quote in this context Invesco's global trading leader, Kevin Cronin, who expressed enthusiasm for "the liquidity for reinvestment approaching real-time agreements", because "the difference between days and minutes can have a real impact on trading strategies. "

Smart contracts

The quickest solution is the easy point to do for blockchains in finance. The probability that this will have important consequences for trading is a natural next realization. Distinct and less intuitive, there is the idea of ​​"smart contracts", as explained by Vitalik Buterin in his 2013 White Paper. It is precisely to allow the intelligent contracts that Buterin's Ether, unlike of Satoshi's Bitcoin, both built with a more robust code, encouraging the Apps, so that Ethereum has always been more than simply Ether.

In September 2017, when the Cambridge Center for Alternative Finance came out with a survey on the diffusion of distributed ledger technology, the CCAF found that two-thirds of its respondents claimed to use some kind of intelligent contract capability enabled to DLT.

How do smart contracts mitigate existing inefficiencies? Dowsett and Wield have a multi-part response: for example, they help digitize the customer's life cycle, making the rates more transparent and verifiable. They also help with derivatives, where the traditional manual processing of operations has long been complicated and time-consuming. Beyond that, KYC and AML information can be incorporated into smart contracts, reducing compliance headaches.

Beyond ETFs

Dowsett and Wied also suggest that the blockchain is giving birth to a new generation of funds traded on the stock exchange, which "will further increase disintermediation and perhaps the interruption".

A blockchain-trading fund (BTF) can cut custodians, exchanges and banks, reducing costs and "opening a 24 × 7 business cycle".

Risks and a Leapfrog effect

With the benefits of an extensive use of blockchains in finance, there are risks, and even the Invesco article discusses them. DLT, by its nature, does not have a specific position or a central administrator. This problem raises "substantial obstacles in terms of jurisdiction and applicable law," say Dowsett and Wied. It means that the creation of a regulatory framework "is likely to turn out to be a polemical affair", with all the uncertainty linked to the dispute.

Related to this: it is an industry with an 'environmental footprint, in terms of computing power, associated currency mines and energy consumption needed.

More generally: every interruption has losers. This, after all, is the reason why the word "perturbation" has had a negative connotation until recently.

Dowsett and Wied end up with an observation on India. The subcontinent may be ready to become a leader in the blockchain world, largely because it lacks legacy technologies that could hold it back. "There is little reason for a country like India to invest in systems such as ATMs, or even contactless credit cards," they write, "when it might be easier and cheaper to adopt a method of much faster and simpler transaction. "Through smartphones, cryptocurrencies and, yes, blockchains.

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