Banks are making big bets on blockchain and will invest an estimated $400 million into the technology—the digital public ledger that enables the usage of cryptocurrencies such as bitcoin—by 2019, according to new estimates from financial services research firm Aite Group. Financial institutions spent an estimate $75 million on the technology this year.
Most financial institutions argue that they’re not interested in crypto currencies per se. But many are increasingly focused on the potential usage of blockchain technology for functions such as settlement, the crucial but unglamorous moment when cash and securities are exchanged between buyers and sellers.
While trading activity has become an increasingly high-speed, computerized function in recent years, settlement can still take days, exposing banks to the risk that their trading partners could become insolvent during the period after a trade is executed, but before it is settled. This is known as settlement risk.
“Blockchain’s inherent cryptographic nature makes every transaction more transparent, secure, and irreversible, mitigating clearing and settlement risk,” the Aite report said.
Some Wall Street firms seem to agree.
Goldman Sachs has developed its own cryptocurrency for a settlement system for trading stocks, bonds and other assets, according to a recently published patent filing.
JPMorgan, the London Stock Exchange Group, Wells Fargo, and State Street recently announced they joined a consortium with IBM, Intel, and Cisco and blockchain startup Hyperledger (now owned by Digital Assets Holdings) to develop blockchain technology.
R3, a blockchain startup, partnered with 30 major banks like HSBC, Citi, and Bank of America earlier this year to build a blockchain system that would allow the banks to more easily transfer funds with one another.
Of course, the ascent of blockchain is by no means assured. For one thing, it’s unclear how some elements of the technology—for instance its focus on anonymity—can be reconciled with the heavily regulated nature of the US financial services industry.
“Unless blockchain enthusiasts understand these inherent regulatory restrictions, massive adoption of blockchain technology within the financial services industry will not be possible,” the Aite report said.