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The Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

Divorcing blockchain from bitcoin: how blockchain could reduce transaction cost and improve compliance

The UK government last week outlined how the use of blockchain, a type of distributed ledger technology, could improve the efficiency and accuracy of public services management.

Most in the financial services industry will be aware of the possibilities, but too many are still wary because they link blockchain with digital currency bitcoin. But blockchain is a transaction and asset tracking tool that can be used completely independently of the controversial digital currency.

It can reduce costs inherent in current transactional systems, improve security and get companies closer to the goal of having a real time record of transaction.

When considering the potential of blockchain technology, every financial services organisation should ask – what transactions, assets, intellectual property, identities and data do we need to keep track of in a reliable, secure, accurate and close to real-time way? They should also ask with whom do we need to share this information, and how efficiently can we currently do so?

Ken Moore, head of CitiBank’s innovation lab, told BankingTech.com: “at the moment, 6-8% of global payments flow gets lost. That’s worth trillions today. If we use blockchain, we could address that”.

Keeping track of payments is just one example of data that needs to be constantly tracked and verified.   

As its core, blockchain technology is a distributed shared ledger that keeps account of transactions and assets. It can also be thought of as a database that can be viewed by many individuals situated in various locations all over the world. The key is that it provides a single consistent view of information that anyone (who has permission to do so) can review at any time.

It is claimed that blockchain technology can be trusted to present an accurate record of a ledger. It is more secure than almost any other digital technology that we currently use to record information on; and as it is decentralised (or distributed across a network), it removes the risk of a single point of failure.

It is also claimed that blockchain technology can be used to provide a 'near real-time' record, although there are concerns about how true this is when use of it is scaled up. Many are naturally sceptical of these claims, and there is a clear need to test their veracity. So far, though, broadly they have withstood challenge.

Financial services businesses know only too well that they have a pressing need to innovate to save costs and improve efficiency in the ways in which they record and share information. To take an example, there are significant costs involved in meeting regulatory reporting requirements – a cost that is being dramatically augmented by the introduction of the second Markets in Financial Instruments Directive (MiFID II).

With MiFID II on the horizon, investment firms will be required to adjust their IT systems and data formats to ensure that they comply with a greatly expanded obligation to share information with regulators. While MiFID I generally required that 'financial instruments admitted to trading on regulated markets' and some over-the-counter derivative instruments be reported, MiFID II extends this obligation to capture, among other things, what is being traded on EU trading venues, 'multilateral trading facilities' and 'organised trading facilities.'

The Treasury's Impact Assessment for MiFID II has suggested that the overall cost of implementing the new rules will be substantial. "The MiFID review is estimated to impose one-off compliance costs of between €512 and €732 million and ongoing costs of between €312 and €586 million on relevant firms", primarily 'investment firms', according to the Impact Assessment.

It is therefore not hard to see how a reliable shareable record could improve the efficiency of financial services businesses in terms of regulatory reporting. Rather than adapting systems in an attempt to demonstrate that a business's own version of events matches that of a regulators, blockchain technology could enable a single consistent record for all to view to exist.