Potential blockchain savings too important to ignore, report says
More than a quarter of European listed stock exchange’s costs currently relate to post-trade, analysis by J.P Morgan shows, and blockchain could be one way to save the pennies.
Analysts at the investment bank believe post-trade efficiences in the order of 30% are achievable via blockchain – the core technology underpinning bitcoin - which would lower aggregate costs by 7% across the exchanges.
Although the stats take no account of any potential hit to post-trade revenues or the initial investment required to facilitate blockchain testing and integration, J.P Morgan believes savings would remain favorable on a net basis.
“Proponents believe blockchain has scope to tackle certain limitations of the current post-trade system by streamlining, simplifying and ultimately improving the process,” says Gurjit S Kambo, equity analyst at J.P. Morgan Securities.
“Hence, blockchain could help reduce the time, cost and counterparty risk associated with clearing and settlement. Consequently, clients could benefit from lower capital requirements, while liquidity across the system could be increased.”
In his research note, the analyst says that blockchain has the greatest potential to transform the post-trade ecosystem as pre-trade processes have already seen efficiency improvements over the past decade.
Although Kambo says companies interested in blockchain appear to be in the exploratory phase with respect to investment.
“Mass adoption of the technology still appears distant, in our view, with market participants on average forecasting mainstream integration of blockchain only after 2025,” Kambo added in his note to investment clients.
Asset managers
While efficiency gains are most obvious catalyst for exchanges, Kambo's research report claims blockchain also has the potential to alleviate fee pressure in the asset management industry.
The sector faces pressure to lower fees for investors, but blockchain could help by passing efficiency gains in fund admin costs.
“We estimate c36% of UK asset management industry costs relate to middle/back office functions, which may benefit from blockchain," Kambo adds.
"Assuming that 25% of such costs could be reduced implies industry savings of c£1bn (c9%), which could offset fee pressure."
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