Thomas Olsen: Blockchain Impacts on Financial Ecosystems

Read the transcript below.

THOMAS OLSEN: Distributed ledgers, smart contracts, and other new technology have really triggered a conceptual rethink of how financial markets work. And after an initial exploration phase, experiments are gaining momentum, and we're starting to see a shift to real-life applications. In fact, 80% of financial market executives surveyed by Bain said they expected transformative impact and adoption within the next three to five years.

Yet paradoxically, of that same group we interviewed and surveyed, almost 40% said their firms are taking a wait-and-see approach. And there are some good reasons for that. There's regulatory uncertainty. They're under near-term financial pressure. And a lot of the distributed-ledger use cases create competitive game theory dilemmas for them. But the cost and market structure impacts of distributed ledgers can't be ignored. The stakes are high.

We've estimated that the total cost and capital savings for global financial markets could be between $15 billion and $30 billion a year, mostly in post-trade processing efficiency. Now, some firms will benefit from this clearly, but over time, we see the bulk of the savings being passed on to end-investors and corporate issuers as the markets become more efficient.

And one of the most interesting potential benefits here is going to be through improved reference data, analytics, and applications with machine intelligence as more efficient ecosystems create new opportunities. But now the biggest questions are really less about the potential benefits and more about how to get there. We expect the evolution of this to happen in very different ways and different pace across jurisdictions, asset classes and activities. This creates a piecemeal and complex implementation path, especially for the global firms.

Because of this, opportunities to mutualize the investment and migration costs with third parties and utilities appears to becoming an increasingly important part of accelerating progress. The most sophisticated players are already taking a systematic, top-down and bottom-up approach to this, focused primarily on three questions.

How will the market ecosystems evolve? What role should we play? And then how should we posture and prioritize around distributed ledgers? Ultimately, we see the winners focusing on how to create more efficient market ecosystems despite the momentum, and even temptation, to maintain some of the inefficiencies of today.

Read the Bain Brief: Blockchain in Financial Markets—How to Gain an Edge