Blockchain Disruption in the Financial Services

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“It is only a matter of time before the broader financial services and banking industries shift to blockchain and network-based approaches.” Financial times

http://www.metaopsmagazine.com/blockchain-disruption-financial-services/For the massive financial services sector, blockchain technology offers an opportunity to overhaul its existing business model, including its banking infrastructure, approach to settlements and customer interactions. But acting on this opportunity, and making the most of the blockchain, is no easy task given the core beliefs and reinforcing systems that are embedded in the industry.

One of the core beliefs of stock market investing is the “random walk” theory of the equities markets. In short, the Theory believes that stock prices are random in nature. However, given that markets are made up of human beings, there exists a strong suspicion that market and stock price movements may not be random after all.

To make markets run smoothly and stay liquid, there exists a position in the buy-sell transaction process that does lend itself to potential manipulation, and that is in the area of the “market maker.” A market maker is a company or an individual that quotes both a buy and a selling price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread. In other words, market makers are intermediaries with strong ties with certain public companies who can purchase-usually at slight discount the shares or futures contracts with the ability to then buy or sell to the public marketplace. So much for a random walk. Now, there are many smaller stocks that do not trade in large enough volumes to have a very close relationship with market makers, and the random walk theory may apply to the smaller, less traded investment vehicles. But the idea that investors purchase the stock directly from the market is not correct. For the most part, Investors buy or sell through a middle-man; the market makers.

The typical retail investment process flow:

http://www.metaopsmagazine.com/blockchain-disruption-financial-services/1.) The client requests that a trade (either buy or sale) be made by calling a broker with the investment firm. 2.) The broker enters the trade order into the electronic communication system. 3.) The communication system sends the order to the firm representative on the exchange and starts the electronic audit trail. 4) The firm’s representative goes to the specialist or Market Maker for that equity.  The Market quotes the buy or sells price. At this point, the transaction is usually made. 5.) The finalized transaction is recorded and audit trail completed. Copies are sent the firm and the client. 6.) Money to cover the trade is taken out of the client´s account and transferred into the firm´s account to cover the total transaction cost (including commissions and any other fees).

Goodbye Market Makers?

With the advent of the blockchain infrastructure and its pier to pier capabilities, investors and companies could deal directly and by-pass market makers and their additional transaction costs. Although the pool of commissions paid has been shrinking over the past few decades as a discount, online brokers have put significant downward pressure on commissions, the larger institutional traders such as banks and pension funds still charge billions in commissions, investors of all categories could significantly reduce trading costs by using pier-to-pier investing through the blockchain.

 It is ironic that blockchain will most likely negatively impact the job prospects in the financial industry as well as other businesses, but it may be a technical solution to help provide a foundation for a new evolution of economic policies.

The Big Disruption Could Come…but don’t count on it.

Some futurists- myself included-envision the potential of becoming a real game changer when it comes to an evolving economic paradigm. Imagine, all transactions taking place on the blockchain infrastructure and actual physical money becoming a thing of the past. Get this: governments could collect taxes on each transaction, and there would be no IRS or income taxes. Indeed, the taxes collected on each transaction could be greatly reduced due to the volume of taxable events producing sufficient income while at the same time totally disrupting the taxation industry. It could be a net, net gain for all. Of course, doing away with physical money has been a real pillar for the conspiracy groups as it might allow government too much control and information. However, we may already be there and just not know it. Criminals and others who play fraudulent games wouldn’t want a totally digital transaction world but have faith; where ever there is a system designed by humans, there will be humans learning how to game it. However, on a serious side, I wonder how much tax revenue from a huge volume of digital transactions could be generated on say a 12% transaction tax. Could it provide enough tax revenue to generate the ability for more government programs to help reduce the growing income gap around the world? Moreover, when and if Artificial Intelligence does move into our lives in such a way to displace a large percentage of the working population, could the blockchain tax plan help dampen the potential disruption that may be headed our way?

Think about it: nine billion people are soon to inhabit our planet. How will our current economic system provide enough jobs and income? Perhaps tapping into blockchain could help to leverage the numbers and help pave the way for a different way of distributing income.

It is ironic that blockchain will most likely negatively impact the job prospects in the financial industry as well as other businesses, but it may be a technical solution to help provide a foundation for a new evolution of economic policies.

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