Do not underestimate the challenge of blockchain

For blockchain to play a significant part in areas such as central counterparty party clearing, trade settlement, collateral management, regulatory reporting, and corporate actions, it must first overcome some operational and regulatory challenges, says a new report from Standard Chartered Bank.

In the report, the bank explores whether blockchain could disrupt the European Central Bank’s (ECB) Target2Securities (TS2) project, which aims to standardise European cross-border trade settlement by integrating securities and cash accounts onto a single IT platform. Some people have suggested that blockchain could play a material role in TS2, or even replace it, Standard Chartered notes.

Blockchain’s benefits, such as real-time settlement capability, reducing counterparty risk and enhanced automation, could certainly disrupt TS2. However, right now it’s unclear if the disruptive technology could cope with European markets’ high transaction volumes, says the bank.

The ECB estimates that daily T2S peak volumes will reach 4.7 million transactions with a value of approximately Eur 10 trillion to EUR 15 trillion. By contrast, daily transactional volumes in Bitcoin total around 250,000 with a value of just US$ 257 million.

Blockchain’s success will also be conditional on a smooth integration with legacy technologies, Standard Chartered continues. The costs of getting this wrong could be high, it warns, and in an increasingly digital world, it is vital that blockchain proves to the market that it is secure from cyber-attacks.

Nobody can deny that blockchain has the potential to impact markets globally, including emerging economies which are in the early stages of developing their market infrastructures, says Standard Chartered.

But distributed ledger technology – should it truly take off – is likely to take years to come into fruition, simply because it will require harmonised standards and regulation agreed by the industry securities services industry, regulators and governments. The scale of this challenge should not be underestimated.