While the crypto world descends into chaos, dedicated teams inside financial services firms continue quietly going about their business, rolling out blockchain-based products that are solving real-life problems for customers. Some amazing things happen when the technology that was used to create cryptocurrencies is applied to actual business challenges.
Over the past two years, financial services firms have launched of a series of products and services using distributed ledger technology (DLT). These new offerings have something many high-profile crypto products lack: practical applications. As we speak, DLT solutions are running live in bonds, equities, structured products, mortgages, repo markets, life insurance, annuities and healthcare claims. These are not blockchain experiments. We’re talking about real businesses, with established and growing client bases and hundreds of millions of dollars in annual revenues.
Tokenization and Digital Assets
Although cryptocurrencies were the first major use case to emerge using DLT, financial service providers quicky recognized the transformative potential of the blockchain. The industry started investing huge amounts to find new opportunities to apply the technology. Fueled by those investments, digital assets began evolving in parallel with crypto. Some of the earliest success in asset digitization came in bonds, which for a variety of reasons proved quite conducive to tokenization. Looking forward, industry players see big potential in real estate, funds, collateral and OTC derivatives. In these and other asset classes, the opportunity set for DLT is enormous, because it involves not just the simple act of tokenization, but also the digitization of the entire life cycle of an asset. It is here that DLT can create huge efficiencies.
While the potential cost savings from those efficiencies has attracted the attention and resources of banks, dealers and the rest of the sell side, the buy side has been slower to sign on. That’s understandable. Sell-side firms see opportunities to realize immediate benefits from DLT applications in internal operations and functions, or from applications involving only a counterparty or two. For the buy side, the biggest benefits of new technology platforms usually materialize only when the systems begin to attract enough users to produce network effects.
For that reason, some of the most successful DLT use cases to date have been those that deliver substantial and immediate benefits to their earliest users. That includes, for example, Broadridge’s Distributed Ledger Repo (DLR) Platform.
Every day, trillions of dollars’ worth of securities trade in the global repo market. These transactions are quite complex, which makes them prone to errors, failures and disputes. Blockchain technology can help simplify and streamline these trades by digitizing the underlying securities in a repo transaction while transferring ownership via smart contracts.
That’s the same approach development teams are taking with DLT applications across asset classes and throughout the financial services industry. They are carefully applying blockchain technology to solve specific problems and eliminate nagging inefficiencies and hoping that they can create enough value to attract customers. Unlike the front-page sagas of crypto celebrities, this work might not be very sexy, but it is successful. And even if crypto implodes, these teams will continue to make steady progress — and could someday transform financial services. This is only the beginning. DLT will be as profound as relational database technology, TCP/IP (Transfer Control Protocol/Internet Protocol) and arguably, over time, the internet itself.