On Aug. 12, 2016, the World Economic Forum in Davos issued a report that predicts that distributive ledger systems, or blockchains, could enable banks to offer cheaper, faster and more secure services, without using bitcoin or other virtual currencies for transactions, according to the New York Times. Distributed ledger technology, or blockchain, is a system of maintaining records that is operated by a network of users, rather than, in the case of traditional banking, a single financial institution. The New York Times has drawn comparisons to the network of users who maintain Wikipedia. The use of digital ledger technology in the financial services industry could permit multiple banks to move money and track transactions in new ways across borders and other networks in a more secure, transparent, and effective manner by allowing multiple points of access to the distributed ledger system. Because blockchains displace the need for third parties intermediaries, blockchains have the potential to reduce transaction costs. This might be especially attractive to businesses which lack a central database they can trust to keep their records.
The report is the result of one year of research and five meetings of senior executives from major financial institutions. The World Economic Forum identified six value-drivers of distributed ledger technology as it could be applied to the financial services industry:
(1) Operational simplification– reduction or elimination of manual energy needed to resolve disputes;
(2) Regulatory efficiency improvement – regulators will be able to monitor activity in real-time;
(3) Counterparty risk reduction – agreements are codified, executed and shared in an immutable environment, limiting the need to rely on trust of counterparties;
(4) Clearing and settlement time reduction – Third parties support transaction verification and accelerates settlement;
(5) Liquidity and capital improvement – reduction of locked in capital would provide transparency in sourcing liquidity for assets; and
(6) Fraud minimization – Asset provenance and transaction history can be established within a single source.
The report further states that distributed ledgers could enable banks to improve mainstream transaction record-keeping like global payments and stock trading and less well-known sectors like trade finance and contingent convertible bonds. The report estimates that 80% of banks globally could start distributed ledger projects by next year. Please click here to view a copy of the report.
Also in August 2016, fifteen global banks, including UBS and Wells Fargo, indicated that they had completed a prototype of a distributed ledger system that could track trade financing around the globe and provide a single database for scattered and hard-to-track transactions, as reported by the New York Times.