KEY POINTS

  • Investors are flocking toward blockchain technology, which is best known for powering Bitcoin and other cryptocurrencies. Spending on capital markets applications of blockchain is expected to grow at a 52% compound annual growth rate (CAGR) through 2019, according to Aite Group, to reach $400 million that year.
  • Blockchain functions as a distributed ledger, or database — every party that uses the database has access to it and participates in its production and upkeep. If applied effectively, the technology could give banks a secure, digital means to process and record transactions and eliminate middlemen.
  • This, in turn, would help banks and other financial institutions cut costs and increase efficiency. Blockchain technology could cut costs across the financial industry by up to $20 billion annually by 2022, according to Santander
  • Banks and major financial institutions are working both collaboratively and independently to develop blockchain tech. Over 50 major financial institutions are involved with collaborative blockchain startups, like R3 CEV or Chain. And many are investing in the technology on their own as well. 
    • Money transfer and settlement is one of the primary potential blockchain applications. Major banks, Goldman Sachs, and Visa Europe all look to be exploring blockchain for this purpose.
    • Shareholder management is another top use case for blockchain. The blockchain's function as a database is particularly relevant to financial institutions because they hold vast databases of customer information. Nasdaq is exploring this application of blockchain.
  • Putting blockchain to use for real-world transactions is likely not that far off. If working groups' tests are successful, firms could be using it to transact real value as early as the end of this year, and we could see widespread industry application within the next few years. 
  • Despite blockchain's advantages, there are some risks that are slowing down blockchain development and mainstream adoption. Because the technology is new and relatively untested, security is still a concern, as is lack of regulations across countries.

Introduction

As customers become increasingly digitally savvy, financial services providers are looking to provide customers with the same services they're accustomed to, but in ways that increase efficiency and improve security while keeping costs down. 

That's where blockchain technology comes in.

Blockchain technology was invented and released in 2009 by a person or group of people known by the pseudonym Satoshi Nakomoto as a way to digitally and anonymously send payments between two participants [...]