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Feb 24, 2020

Blockchain Technology in Finance: Growing but at What Cost to Its Original Purpose?

William HayesBy William J. Hayes, managing editor, Pennsylvania CPA Journal


While the implementation of blockchain among financial institutions is still far from being called “widespread,” 2019 and the first couple months of 2020 have seen more large, traditional institutions begin to take advantage of the technology’s promise. This could result in drastic market and operational benefits for these organizations, but it might have an unforeseen effect too. Are big banks bringing traditional practices into the blockchain sphere that are watering down of its more free-market origins? To discuss this question, we met with Fabio Canesin, cofounder of the decentralized financial services provider, Nash.

Where are traditional financial institutions in implementing blockchain?

Fabio CanesinIt is still very exploratory. Blockchain is evolving extremely quickly, and the risk/reward ratio for deploying the technology on the scale of these institutions is not clear. Most of them have been experimenting through smaller projects that only touch less-complex systems.

The evolution of blockchain technology will not come to a halt. It will continue to improve, and the benefits it offers over legacy systems will only grow. When blockchain represents a significant step up in efficiency (say, plus 60%), it becomes a no-brainer business decision to take on the development and migration costs to reap the benefits of the new technology.

At the moment, traditional finance firms are still migrating to centralized cloud solutions and scalable microservice architectures. They still have a big and, for them, more fruitful path to walk before developing complex cryptosystems. Taking the risk as a startup is much easier: users are early adopters, and you need to grow to survive.

Are there drawbacks to institutions bringing traditional practices into these emerging markets?

It makes little sense to translate the majority of operational practices. At the same time, finance and economics remain the same, regardless of the technology involved. More fundamental accounting, modeling, and financing practices will translate with no issue.

Bitcoin and Digital CurrenciesIt will be very hard to bring the same user-relationship models they have used to the digital finance realm. The user is now global, much more used to online experiences and a lot less patient with unavailability. On the flip side, you now have data and transparency that can feed back into well-developed and understood lending and borrowing businesses. Risk management can be enhanced using this knowledge and capital accumulated on the basis of historical operations.

Are there ways that these institutions can adopt blockchain and digital assets without going against blockchain’s originally intent?

The original digital asset, Bitcoin, was created with the sole purpose of being a currency. However, like any revolutionary technology, new use cases have appeared. For example, it makes perfect sense for institutions to take advantage of blockchain for identity verification purposes. At its core, Bitcoin can be seen as an accounting system instead of actually moving funds. What you are doing is proving some kind of digital ownership of the balance and account on a ledger. This idea, and the technology of proving ownership of a digital good, can be adapted to identity and any other kinds of data, such as the content of social networks, a bond, or a futures contract.

What’s in store for institutional traders and investors in this area?

In general, the industry expected greater participation during 2019, fueled by the efforts of players like Fidelity and ICE. However, the end of the year did witness an increase in capital entering the space again, so the beginning of 2020 might equate to what people expected for the second half of 2019.

In part, I think it will be helped by the launch of the first central-bank-issued digital currencies. These will likely share a lot of the technological underpinnings of cryptocurrency, minus the decentralization. The friction of entering and exiting investment positions will be negligible and virtually costless, fueling the investment wave.

With time, blockchain services will not only match but surpass the convenience and security of traditional services, finally allowing the industry to compete mainly on the merits of digital assets' properties. This should also open the door for a massive digital securitization of assets, beginning at end of 2020.


Fabio Canesin is the cofounder of Nash. He can be reached at canesin@nash.io.


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Disclaimer
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.