It's been hard to ignore the huge fluctuations in cryptocurrency value of late. Google created big headlines and caused even bigger ripples in the market recently when it announced its decision to ban all cryptocurrency ads starting in June, citing fears over transparency and user safety as the reason for said decision. The market dropped a cool $60 billion in value as a result, but Bitcoin prices have since recovered from their five-week lows of $7,676.
Regardless of the recent furor surrounding the tumultuous cryptocurrency market, the blockchain technology underlying its functionality is widely believed to actually be a better place to look for value.
One place that blockchain may find its true value is in association with the financial services industry. After all, blockchain offers an unprecedented opportunity for financial firms to cut down on the vast and costly number of middlemen that help keep their operations running. According to estimates from Spanish bank Santander, the industry could save an estimated $20 billion per year by investing in solutions that use the online distributed ledger technology (DLT).
It's not just asset managers who may be able to tap into the potential of blockchain either. From settling transactions to trading securities, the technology is being explored by both large and nimble players in finance.
Online broker ThinkMarkets recently announced the launch of the first multi-asset blockchain exchange ThinkConnect, which will facilitate peer-to-peer trading between private individual and organizations. The platform promises to encompass a wide variety of financial products (including cryptocurrencies, equities, foreign exchange, precious metals and all other commodities), and also remove intermediaries, cutting down on costs, and employ artificial intelligence (AI), expediting the process. By creating a digital profile of each participant, the system should be able to quickly and easily match an appropriate investor with a supplier, while the use of blockchain technology enhances transparency and speeds up the whole process.
Meanwhile, software giant IBM used its annual Investor Day to release a webcast highlighting its work with blockchain and extolling its virtues as the transaction technology of the future. Late last year, IBM partnered with regional services company KlickEx Group and Silicon Valley non-profit Stellar.org to pioneer a new cross-border blockchain payments initiative, aimed at improving efficiency and cutting costs. IBM is also leading the way in integration of blockchain with AI projects, with a potential goal of using the former to govern the latter. Top executives at IBM predict that blockchain will have a supply chain disruption value of $1.8 trillion and an even greater disruptive effect on payments of $2 trillion, claiming it will do for the transaction sector what "Internet did for communications and data."
Many banks are starting to experiment with the technology as well, with Sberbank, Russia's largest bank by assets, opening its own blockchain laboratory. The lab will aim to develop prototypes for new products and test new blockchain-based solutions for the company, working with both internal specialists, as well as with start-ups and other outside firms.
Announcements of new research labs by companies can sometimes simply be a marketing ploy - showing off to clients and competitors the innovation agenda and ability to invest in research. However, Sberbank has a long history of investing in new innovations and tech platforms to sell globally, which prompted Brand Finance to name the group Russia's most valuable brand. In addition to the new lab, Sberbank is already a member of two of the biggest open-source blockchain consortiums and claiming to already be working on over 20 blockchain-based projects.
Not so fast
Of course, with the new technology still in its infancy, there are still many hurdles in the journey to widespread adoption.
One issue is that blockchain has a scaling problem. As the number of transactions goes up, the completion speed goes down, and for an industry for which time is of the essence, re-engineering these delays is vital. One potential rival is DLT Hashgraph, which claims to be superior to blockchain in every way; more computationally efficient, more resistant to excessive traffic and more bandwidth efficient.
Another challenge is the disparity between the languages and systems of the blockchain innovators and the current financial institutions. Communicating the industry's complex problems in a language which makes sense to non-financial developers who are focused on building the technology alone is a mighty task. Finding both internal talent and external collaborators who have the ability to close the gap between the two worlds is crucial.
Despite these challenges, it would be short-sighted for fund managers to brush off the current news hype around cryptocurrencies and ignore the potential the technology can bring.