Blockchain / Distributed Ledger Technology role in Financial Services future:
My interest in blockchain and distributed ledger technology, or ‘DLT’, began at a time when DLT was either a term never used or one that I never came across. So, just to clarify the difference, rather like a hoover is just one type of vacuum cleaner, or a petrol engine is just one type of engine, so too is a blockchain just one type of DLT.
The advances in newer blockchain and Distributed Ledger Technologies in recent years to answer many of the justified concerns around earlier blockchain capabilities has seen the types of DLT offerings move away from inefficient blockchains and into infinitely more efficient, scalable and future proof solutions that exceed the technical requirements of incumbent technologies in enterprise solutions.
There is no logic to comparing the role, purpose and reason behind the original blockchain in action, to very many of the current enterprise DLT solutions that are so polar removed from what blockchain originally was and in some cases still is. They bear zero comparison. There is added confusion in this regard when proponents of such blockchains of restrictive scalability and performance insist on putting them forward as an enterprise solution, when the truth is they can’t scale!
People actively involved in the financial service industry are well aware of the many inefficiencies they labour under the burden of: archaic systems interwoven with a plethora of newer systems, rapidly growing volumes of regulation and therefore ever-increasing reporting plus excessive friction and inefficiency in settlements are examples of this.
It makes absolute sense therefore, that financial services industry professionals are the people best served to answer as to how a radical fast progressing new technology like DLT can be utilised to effect change in how things are done in financial services.
How can an elaborate record keeper (ledger) effect so much change, I hear the confused cry? The answers are already in the public domain. A DLT is at its heart a triple ledger audit trail. Embracing automated triple accounting ledgers with the correct integration of existing technologies such as cloud storage, IoT devices, AI and / or Machine learning along with the appropriate web interface can cause major disruption in many traditional areas of the financial services industry.
Simply and very broadly put, any solution that is able to replace the need for third parties to audit, verify and maybe store transactional data with an automated series of technological processes that can be undisputedly verified as having happened and at what precise times they happened, is a solution that can remove entire swathes of inefficiency from the financial services industry.
One great example of a problem that would be eliminated with the appropriate use of an enterprise efficient DLT based platform is the Dole Foods case in the U.S.A. In 2013, they were acquired for $1.2 Billion. In the settlement, 4,662 entities claimed 49,164,415 shares at $2.74 per share.
Turns out that caused 12,370,657 problems: Dole had only 36,793,758 shares outstanding!
Considerable time was consumed in establishing the cause, investigating the reasons and huge legal costs were incurred in the 4 years before a case was settled in this regard.
A DLT solution to the complexities in share trading not only alleviates those “back office” problems but also brings further solutions in that the technology allows for fractionalising equity and other “real-world” assets, so they can be represented digitally and thereby issued and distributed in a direct, cheaper way, with the technology ensuring the regulatory requirements are upheld.
One clear example of this is an REIT named Elevated Returns. They were considering a move to create an IPO of the luxurious St. Regis Aspen resort. The figures proposed were to raise $ 33.5 Million for 49% equity. Instead, they decided to test how a Real Estate Security Token offering might work. They succeeded in dramatic fashion by selling $ 18 Million of security tokens in less than 60 days in exchange for only 18.7% equity dilution. Pro rata, this is a saving of $5.7 Million for that 18.7% versus the IPO route and whilst also saving substantial fees in not carrying out an IPO.
Elevated Returns recently released a press statement stating they were preparing over $ 1 Billion worth of their performing property portfolio for a series of further STO issuances. One key benefit of them doing so is that even with the STO sale being restricted to accredited investors, the fact that they could fractionalise the equity to $1 in exchange for 1 equity token and set the minimum buy in at $10,000, they were hence able to reach a far wider demographic of buyers, but with almost no on-boarding cost that would normally be linked with such share issuances.
There are examples of this process across many asset classes and industries as just one way in which DLT can cause change in the Financial Services industry across the globe. The fact it is happening suggests that the industry itself needs to be aware and has a job to do in educating itself by doing the right research and asking the correct probing questions around DLT and the appropriate applications of this to their needs.