31 March 2017
What is blockchain?
There is a lot of ongoing discussion about blockchain technology, but how much do people know or understand about it? The concept of blockchain has been around for a good few years now, having been first identified back in 1991. The best known implementation of blockchain theory so far has been as the basis of Bitcoin, the digital currency, launched in 2009.
Blockchain is a distributed database that expands as data (called blocks) is added. A key feature is that once added, the blocks, which contain a time stamp, cannot be altered in any way. They are secure, permanent and verifiable, and ideal for recording key events, information and transactions.
What are its uses?
A feature of blockchain is smart contracts; these are codes or programmes that generate instructions in certain situations that are pre-determined. Like the blocks, they are secure, permanent and verifiable.
Using blockchain, companies can digitise and automate many facets of their business, from shareholder registers, share certificates, syndicated loans and data management. Access to all or only part of the data can be controlled.
Blockchain has the potential to create a single version of the facts, so that all participants have equal access to transparent, real-time data, with the possibility for instant settlement of transactions and automated smart contracts to generate instructions. This can revolutionise the structure of capital markets and the way they operate, and the potential benefits will include:
- verification of shareholdings;
- reduced exposure to risk;
- easier KYC and AML;
- secure, real-time matching of transaction, for immediate settlement;
- automated reporting;
- auto-execution by smart contracts;
- faster processing of completed trades; and
- simplification of accounting and administration.
Market structures would need to change to accommodate blockchain, there would be lower transaction costs, better liquidity although high frequency traders may find they need to wait (maybe for no more than a second or so) for verification of their ownership before they can sell on an asset just acquired.
Don’t worry about all this just yet, this revolution is still (possibly) three to five years away, although that should not be taken as any sort of guarantee! If you have an interest in the capital markets you should make efforts to keep abreast of the technological change that is definitely heading your way.
If you have further questions about blockchain, or any other capital market related question, please contact me or your local UHY corporate finance expert.
