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The distributed ledger technology has to overcome a number of issues to achieve widespread usage by banks, according to a new study from Morgan Stanley.
Analysts from Morgan Stanley have issued a new research on the blockchain technology and the impact it will have on the future of banking industry. As the bank’s experts predict, the distributed ledger is unlikely to reach widespread adoption in the upcoming years due to a number of challenges.
Blockchain, the technology behind bitcoin, is becoming more popular in the financial industry. Last year, the R3CEV startup established a consortium that is working on distributed ledger solutions aimed to change the banking sector. During the recent conference in New York, the company revealed it is now developing eight blockchain proof-of-concepts for the financial industry.
According to the analysts, there are several misconceptions regarding the adoption of the technology. The hurdles that will likely impede blockchain’s use by banks include cost mutualization, governance, security, regulatory concerns, legal risks and the need for right standard.
Blockchain startups, Morgan Stanley says, are unlikely to substitute banks in the near future because of regulatory problems. “Not one bank nor policymaker that we have met with on blockchain gives even a second thought to an unpermissioned public network. KYC, AML and other considerations means it has to be a permissioned network,” the report reads.
“This reduces the risk that a new start-up will be able to disintermediate entire value chains. How many tech companies want to vertically integrate into a regulated financial institution? It seems more likely that they will want to retain their tech-oriented multiple as a supplier of software and consultants to the financial services industry rather than as a regulated financial.”
The proof-of-concept period, Morgan Stanley predicts, will finish in the next two years, while the impact of the technology will only be felt from 2020.
By using the distributed ledger system, banks will be able to significantly cut their expenditures. “We’re not talking five, ten, 15% cuts in costs we’re talking 30/40/50%,” the analysts said. “There’s only one way to do that and that is to share a mutualized common infrastructure that previously was kept separately and run independently by every market participant.”
Blockchain will allow banks to avoid mistakes, as details of the transaction can be viewed by any related party, such as accountants, controllers and lawyers. “Fewer mistakes means less capital tied up in disputed trades and more capital for new trades improving velocity of capital,” the report reads.
In addition to lower costs, the technology significantly raises the speed of transaction. “Transactions are more streamlined as a buyer’s and seller’s account update simultaneously when a transaction is authorised.” Also, blockchain eliminates the risk of fraud, as it can be easily checked who authorised approval for a transaction.
Meantime, the technology could have a negative impact on those working with trade finance payments. “With a blockchain, all parties – financiers, trading houses, and any other trusted intermediaries – are able to see when the goods have shipped and can release funding appropriately. This should reduce time to confirm assets, confirm transaction, release payment and received confirmations,” Morgan Stanley noted.
For banks, which obtain revenues from ensuring securities are accurately moved, the blockchain “threatens their value add and shorter settlement periods could cut into revenues more than they could free up capital for buybacks”.