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The interest in blockchain from the financial community has been tremendous. Ambitions for decentralizing trust, greater transactional transparency, an immutable record, compacting settlement periods, and the freeing up of capital while reducing settlement counterparty risk has many both outside and inside the industry salivating.
While the idea of moving to real-time settlement is especially intriguing, firms must first understand the industry’s fears before re-engineering the current processes. In TABB Group’s latest research, “Blockchain Clearing and Settlement: Crossing the Chasm,” TABB CEO Larry Tabb explains that details over informational leakage, how the securities lending and foreign exchange markets operate, as well as what actually occurs in the clearing process today, must be addressed before the industry begins restructuring firms’ processing facilities with blockchain technology.
The TABB report illustrates how the challenges for blockchain adoption align by market segment across institutional investors, retail investors, custodians and investment banks, and highlights the need to overcome the practical aspects of ownership, securities lending, foreign exchange, block allocations, the processing of physical securities, fractional ownership, and current clearing, netting and settlement practices, not to mention the modification and rebuilding of firms’ internal technology.
“While some issues are significant to particular market slices, they may be non-issues for others, and things that may appear easy from the outside, may actually be very challenging,” says Tabb. “For example, streamlining the allocations process may appear simple from a brokerage or custodian perspective, but problematic for investors; conversely, clearing and netting is a non-issue for investors while challenging for banks and brokers.”
The blockchain has substantial capabilities to automate the processing for many types of securities; however, Tabb concludes that in order for the public blockchain to replace the core processing for equities, sovereign debt, or other liquid products, many massive and in some cases seemingly insurmountable challenges need to be overcome.
The 20-page, 9-exhibit report is now available for download by TABB financial technology and equities clients, as well as pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the report, contact info@tabbgroup.com.
