Citi, JPMorgan Chase are joining the game, how will blockchain change financial services?

Citi and JPMorgan Chase Enter the Game The Impact of Blockchain on Financial Services

Author: Stephen Gandel

Former J.P. Morgan executive and one of Wall Street’s most famous financiers, Blythe Masters, was appointed CEO of blockchain company Digital Asset Holdings in 2015, leading many to believe that this technology, used to build secure transaction networks, would disrupt the financial services industry.

At the time, Masters told Bloomberg News, “You should take this technology as seriously as you did the development of the internet in the early 1990s.”

Eight years later, the influence of blockchain start-ups like Digital Asset in the financial world is still limited, except in the realm of crypto, which is where this technology originated. Masters left Digital Asset three years after joining, and in May of this year, she returned to Wall Street to participate in the tumultuous effort to save Credit Suisse.

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The crypto crash shocked the industry

After last year’s crypto explosion, the financial services industry seems more uncertain about how to take blockchain seriously than it did eight years ago. At the end of last year, several high-profile blockchain projects, including the Australian Securities Exchange, were put on hold following the collapse of the crypto exchange FTX.

Robert Ruark, head of the U.S. fintech practice at one of the Big Four accounting firms, KPMG, said, “A lot of attention was focused on crypto at the time. When the market crashed, all of that investment contracted.”

However, financial experts say that the prospects for blockchain technology and its potential to transform Wall Street and other industries still exist. One major reason for this is the nature of blockchain itself.

Blockchain is often described as a distributed ledger, essentially a complex and open electronic spreadsheet. Imagine a Google spreadsheet that is open for anyone in the world to use. And blockchain is not just one. Every digital asset, currency, or token has its own blockchain.

However, there is one key element – this is the innovation of blockchain technology and the origin of the word “crypto” – the code of the electronic spreadsheet is encrypted. So while anyone can view the blockchain spreadsheet, to edit it (usually by entering a transaction), you need to have the exact code (sometimes referred to as a key) and you must ensure that the changes you make are meaningful in the rest of the spreadsheet.

Therefore, anyone can view the blockchain, but it is virtually impossible to hack. Of course, that’s not to say that you don’t hear news about blockchain or crypto being hacked – there are, in fact, many cases. But most hacks involve obtaining the key code stored outside the blockchain.

David Treat, senior managing director at Accenture, a consulting firm specializing in technology and capital markets research, said, “Blockchain makes the market more transparent, which is a major advantage of blockchain technology. Everyone can have access to the same information at the same time.” He emphasized that this aligns with the direction of the financial market, which is to “gain more information in an auditable way.”

Why hasn’t the financial market migrated to blockchain yet?

So, what is hindering the progress of the financial market’s migration to blockchain? Treat suggests that it is largely related to regulation. Regulatory bodies must ensure market fairness, so they have to approve changes. This slows down the speed of market migration to new infrastructures – especially in the securities field, such as bonds, commodities, or stocks, where individual investors have already invested a significant amount of money.

Industry experts say another hindrance is related to liquidity. The most active markets often have the best prices and lowest transaction costs, even if other places have better technology and market structures. This is likely why blockchain has shined in the crypto market. Before this technology emerged, the crypto market did not even exist, but it’s not the same in the bond market. In the bond market, trillions of dollars have already been traded through mature networks.

Which industries have adopted blockchain?

Observers say that the most direct areas of blockchain application are functions adjacent to trading and cash markets, such as transaction settlement and processing. Connecting blockchain-recorded transactions with non-blockchain-recorded transactions has always been a barrier in this area.

However, several companies have been developing software that links blockchain with external data, with the most famous being the Web3 service platform called Chainlink. Earlier this year, Swift, the global financial information platform jointly owned by the biggest banks, announced a partnership with Chainlink. In August, SWIFT and Chainlink successfully tested a system for transferring value between blockchains, enabling open but isolated networks to communicate with each other.

Citigroup and JPMorgan Chase have both announced blockchain projects in recent weeks, which is another sign of the wider adoption of blockchain in the traditional banking industry.

Citibank is testing a blockchain project that will allow its institutional and corporate clients to convert cash into digital tokens, making it easier to move funds when traditional financial markets are closed. Currently, Citibank’s tokens can only be transferred internally, but the bank is working with regulatory agencies and other financial institutions to create a framework that allows the tokens to be transferred between banks and other institutions.

JPMorgan Chase announced in early October that it has started using a settlement network built with blockchain technology to process transactions between its clients.

“When I take a step back and look at the blockchain projects in the traditional financial market, I think the progress is quite good,” said Treat from Accenture. “The vision of simplifying blockchain networks already exists, it just needs time.”

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