Despite all the buzz around how distributed-ledger technology will revolutionize the middle and back office of financial services, it could not have shown up at a worse time.
The generic name for bitcoin's blockchain technology shows promise in simplifying post-trade processing by providing a single golden copy of critical data that every party involved in a trade can use, instead of relying on multiple versions of the same data stored in disparate systems.
But there’s a significant timing issue when it comes to adopting distributed-ledger technology: it’s not ready for the enterprise yet. Right now, it is a wonder of theoretical technology that every tech concern is investigating, but the first proofs-of-concepts are at least 12 to 18 months away. And that does not take into consideration the development of industry-accepted standards for implementing distributed-ledger technology.
With previous innovations like open source or HTML5, institutions could simply wait until the technology matured before adopting. But this is not the case for distributed-ledger technology in the back office.
The U.S. capital markets are in the midst of an expensive multi-year project to shorten trade settlement process from three days after a trade is made (T+3) to two days (T+2), a migration that pulls in the buy side, sell side, trading venues, and clearinghouses. If all goes to plan, the new T+2 settlement cycle will go live in the third quarter of 2017, or about the same time the industry likely will see mature and available distributed-ledger technology.
Since technology investment in the back office tends to be driven by risk reduction and cost savings rather than capturing alpha, distributed-ledger technology will need to provide a significant return on investment to warrant organizations ripping out and replacing the technology they just spent the past two years installing.
Alternatively,financial regulators could mandate the industry to adopt the new technology in the back office, but it’s doubtful that they would have the appetite to do so after completing a large project as moving to T+2.
The financial industry definitely will benefit by adopting distributed-ledger technology once the technology is fully baked, but it won’t have as large of an effect as it could have had due to unfortunate regulatory timing.
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