BLOCKCHAIN: THE SECOND COMING IS NIGH
- Security, scalability and regulation improvements are making Blockchain tech investible for mainstream capital
- This second wave of interest is likely to deliver the once-hyped disruption predicted for Distributed Ledger Technology (DLT)
- A new and significant asset class is set to emerge and will impact on the financial services industry
With the initial cryptocurrency hype cycle having burned itself out, Blockchain and DLT technology have dropped off many investors’ radar screens. However, a new sector report by Edison Investment Research highlights a concerted surge in investment by major players across many sectors, fuelled by improving security and scalability as well as evolving regulation. From 2020 onwards, Edison expects DLT adoption to accelerate. This means the technology is likely to finally deliver against its early promise to disrupt the financial services industry. New asset classes are likely to emerge in relatively short timeframes.
Blockchain supports a new asset class
As well as supporting the emergence of Bitcoin and other cryptocurrencies, DLT can be used to tokenize other assets – such as shares and real estate – as well as create new assets that are digital representations of traditional securities. Until now, investment in digital assets has been a mainly retail phenomenon. But with the introduction of new regulations and start-ups professionalizing their operations, institutions are making their move.
Potential to disrupt existing processes
DLT has the potential to replace many processes in the financial sector, including clearance, settlement, trade finance, and data management. Whilst it has the benefit of reducing back-office costs and improving transaction speeds, DLT may also reduce income streams from intermediary roles. As a partial balance, Edison sees new opportunities for services that certify the accuracy of data before entering the blockchain – as well as subsequent monitoring to keep the real assets underlying the tokens safe.
Early-stage market; incumbents starting to enter
The tokenization of assets remains at an early stage, with most projects taking the form of pilots or small-scale trials. However, traditional financial services businesses are starting to enter the market, alongside a plethora of start-ups. Edison now expects a gradual transition to the use of blockchain, starting with use cases that have the strongest commercial rationales.
Ultimately, we expect to see a shift towards asset tokenization across a number of asset classes including non-listed equity, debt with small issue volumes and real estate. Strong interest from central banks in issuing digital currencies further supports our belief that a tipping point has been reached in the institutional adoption of blockchain.
Longer-term, blockchain will reshape the industry
At this early stage, we expect to see more partnerships between traditional financial institutions and digital asset specialists, and longer-term we would expect to see incumbents acquiring the startups to access expertise and regulated businesses.
Milosz Papst author of the report said:
“Blockchain technology is no longer just about cryptocurrency. As the sector surrounding the technology continues to evolve, new applications will continue to emerge. Investors can expect to see the financial services industry revolutionized as companies incorporate the technology into many parts of their operations. But this is still very much a new frontier, and only time will tell what the landscape will look like in a few decade’s time. If this were the internet’s development, the year would be 1996.”
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Disclaimer: This is a paid post and should not be considered as news/advice.