Block Chain in traditional finance and trade settlement

Block Chain in Traditional Finance and Trade Settlements


Blockchain technology brings the promise of the “internet of value”. It allows parties to exchange value, just as the world-wide-web gave the ability to exchange information. Blockchain’s secure, decentralized ledger system has clear advantages, including reduced costs, increased efficiency, and improved transparency.

What better use of blockchain than in traditional finance, specifically position-keeping and trade settlement? Today, participants in the trading industry all maintain their own highly complex accounting systems and rely on messaging infrastructure (such as FIX) to interact. Along with this is a hugely expensive ongoing reconciliation to ensure consistency across the ecosystem.

With all this obvious inefficiency today, and the known improvements that blockchain could offer, it has yet to be widely adopted in traditional finance and trade settlements. The question is, why?

There are many reasons. First, the technology is still relatively new and untested in the traditional finance world. This hurdle is rapidly diminishing however, as blockchain becomes more and more proven in cryptocurrency and decentralized finance. According to Zion Market Research, the DeFi market size was valued at around USD 11.96 Billion in 2021 and is estimated to grow about USD 232.20 Billion by 2030.

Secondly, blockchain continues to evolve. There are a multitude of different blockchain platforms available, including the likes of Bitcoin, Ethereum, Binance Smart Chain, Solana and others, each with its own strengths and weaknesses. Different platforms may not be compatible with one another. New platforms come onstream continually as the industry expands. But along with this expansion, the industry is also consolidating. There are now different types of providers in the crypto space. For example, so called Layer 1 providers offer the basic blockchain backbone. Layer 2 providers work on top of a basic blockchain backbone to add features like scalability and privacy. Layer 3 providers provide decentralized applications (dApps) including financial services. This rapidly changing technology landscape can make it challenging for financial institutions to choose the right one for their needs.

Regulatory challenges present another hurdle, with ongoing uncertainty, not just in what regulators may enforce today, but what rules they may apply in the future. Recent lawsuits brought by and against the SEC are testament to the difficulties facing market participants. Even accounting treatment is a challenge as authorities like FASB attempt to codify the recording and presentation of various assets held on blockchain and seek public comment as part of the process.

Perhaps the biggest obstacle to blockchain adoption lies in its very strength. Blockchain, albeit distributed over multiple independent computers acting as “nodes”, is a single ledger. All parties to any transaction are users of the same ledger. In the traditional finance world, true blockchain adoption requires all participants (stock and bond issuers, exchanges, broker-dealers, clearing merchants, etc.) to all agree on the choice of blockchain, to all hold a high degree of trust in each other, and to all adopt it. This is a massive undertaking, potentially involving a systemic shock to the entire financial system, with all the associated risks.

Several efforts are underway to overcome the hurdles that currently prevent the widespread adoption of blockchain for trade settlements. Leading financial institutions are entering the space, through a range of initiatives – offering custody services for crypto assets, forming consortia for blockchain standardization, and importantly, tokenizing real-world assets to record them on chain.

It is anyone’s guess what the adoption trajectory of blockchain in traditional finance will look like. But there appears to be growing consensus that it will very likely take the form of a traditional “parallel run” in the software development world – more and more institutions will offer a tokenized on-chain representation of real-world assets, on top of their current in-house accounting systems. These representations will converge into a true distributed ledger, and eventually the multitude of disparate ledgers and position keepers will fall away.

This will happen along with a tectonic shift in the supply chain for traditional finance, as brokers, dealers, clearers and depositories deal with potential obliteration, or at least a disruptive change in their business models.

About Fund Studio

Fund Studio is a software and services based middle-office solution for firms that buy or sell securities, derivatives and OTC products. Fund Studio supports front, middle and back-office operations from order management and pre-trade compliance to post-trade allocation and settlement to real-time, slice-and-dice portfolio reporting and shadow NAV.

Fund-Studio excels in a multi-asset class environment with diverse instrument coverage including equities, options, futures, FX and fixed income through to asset-backed securities, credit derivatives, CLO’s loans and bank debt. Managed services include handling daily operations, such as processing all trades, managing cash and margin, reconciliation, reporting, and more.

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