SWIFT Institute Sponsors Research Paper on Blockchains in the Securities Industry

Two blockchain researchers have released an 81-page paper exploring the impact of distributed ledgers on current post-trade securities processes in the financial securities industry.

Michael Mainelli and Alistair Milne, authors of the report The Impact and Potential of Blockchain on the Securities Transaction Lifecycle – which was financed with a research grant from the SWIFT Institute – conducted several interviews and focus group meetings with industry veterans to separate the facts from all the hype generated by the financial press.

The aim of the report was to ascertain the nature of the disruption that distributed ledgers would bring to the securities industry and which parts of the existing infrastructure would have to be upgraded. The report’s abstract reads:

“Our research finds that while the use of Blockchain to validate operational data in mutual distributed ledgers can yield substantial reductions in both cost and risk, the concept of data sharing itself is far from new.”

The abstract also states that for blockchains to become a standard in the industry, there would have to be an unprecedented level of coordination between existing firms and regulators, in addition to substantial financial investments from industry leaders.

One key finding of the report revolved around the potential for blockchains to reduce the role of a “trusted third party” in centrally-controlled financial databases, but not entirely eliminating them. Instead, the report posits a hybrid technology called a mutual distributed ledger, where the trusted third party has much less responsibility and control.

The report states:

“As mutual distributed ledger technology is established, it can be expected to replace two functions of the trusted third party: safeguarding against duplicate or fraudulent transactions and preserving a verifiable public record of all transactions.”

Mainelli and Milne also concluded that the implementation of mutual distributed ledgers would require “substantial reengineering of operational processes” in the securities industry, comparing the transition to the recent move from three-day to two-day settlement for equity trades, which required a great deal of time and resources.

 

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