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How could blockchain technology affect trading and the financial services?

Blockchain is arguably one of the most important technological advancements of the decade, and it’s important to take a step back and think about the long-term implications for the financial sector, and brokerage industry as a whole. 

All trading involves risk. Losses can exceed deposits.
Source: Bloomberg

Whilst most traders focus on the day-to-day price movements of blockchain cryptocurrencies, such as bitcoin and ether, there’s no denying that opinions on blockchain technology are mixed. But that’s a whole different debate, for a different day. Instead we are going to assume Blyth Masters, former head of global commodities at JP Morgan Chase, is right.

'How seriously should you take this? I would take it about as seriously as you should have taken the concept of the internet in the early 1990’s. It’s a big deal. And it is going to change the way our financial world operates.'

With that in mind, let’s review some core areas where blockchain technology could affect the financial sector.

Cutting out the middle man

A key advantage to blockchain technology is cutting out the middle man. In effect, because all transactions on a blockchain are validated by the community based on a mathematical probability, the requirement of a trusted intermediary is unnecessary. Blockchain would allow you to have a decentralised stock exchange, without the need for a brokerage, clearing house, or settlement process. Everyone would transact directly on the decentralised exchange, and the code itself would be sufficient to provide the services that are currently provided by the broker. However, without an intermediary, how would this transfer of assets work in practice?

Let’s take an example where a specific trade goes through at a specific price. Effectively, thousands of those within the community vote on the validity of that transaction, and because it’s in the individual voter’s interest to tell the truth, the community as a whole can validate if that trade went through at that price. No middleman. No trusted third party.

This makes operational costs lower, and reduces risk. Costs are reduced because there is no central party, and in theory, the deal is safer because there isn’t a central trusted authority who could either be hacked or act immorally. The trade can only be validated if it objectively takes place, and there is no requirement to maintain a duplicate reconciliation of ledgers, checks and balances.

Speeding up settlement and clearing

Cutting out middle and back office job roles is also likely to not only affect costs and reduce risk, but also speed up settlement. This would apply not only to things like contract and stock settlement, but also FX settlement. Imagine a world where stocks and FX don’t take two and three days to settle, and transfers between brokerages (or directly between two individuals as discussed above) are processed within minutes rather than weeks. This is the outcome which advocates of blockchain are aiming for.

Instantaneous settlement would also have an effect on liquidity, not only for equities, but basic monetary movements (not just FX dealing). You’d be able to make a payment to a friend or institution over the weekend, and have the payment settle almost instantly, rather than waiting the 3 days plus which is currently required in clearing. Bills could be paid immediately, and there could, in theory, be no cross-boarder friction like there currently is. Although we have the euro, USD, sterling, and Japanese yen as supposedly ‘international currencies’, we’ve never had a truly global monetary system. FX conversion costs would go out the window, and the frictionless movement of money could actually become a reality.

Regulation, reporting, and company auditing

Reporting and regulatory tracking could also become far easier. This applies not only to regulatory documentation of trade activity, but also each individual company’s requirement to audit their balance sheet and submit company accounts. Financial blockchain’s of the future could, in much the same way as the bitcoin blockchain, be publically visible with all transactions automatically and independently validated. Alternatively, blockchain could go further, and only allow regulatory bodies read access to the full ledger, with the wider trading community only having write access on varying degrees of authority.

In summary

Blockchain has huge potential, and the continued adoption and resource given to research throughout the financial sector is testament to this. Although we may see significant price action on blockchain cryptocurrencies in general, the blockchain technology itself is starting to shift into focus for many institutions. Cheaper, faster transactions on an interconnected eco-system without a single point of failure is what’s driving this scalable technology. We may still be in blockchain infancy, but if the rate of adoption continues over the next 10 years, as it has had over the previous 9, then we’re set for a truly disruptive decade in finance.  


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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