Santander InnoVentures, the venture funding unit of Spanish banking giant Santander Group, recently released a paper called Fintech 2.0, promoting technological innovations that will reinvent financial services.
The authors of the paper believe that the combination of the Internet of Things, distributed ledgers – essentially blockchains – and smart contracts will significantly reduce costs.
Specifically in regard to distributed ledgers, they highlight their ability to remove central authorities from certifying ownership and clearing transactions. They note that distributed ledgers can be open, verifying anonymous actors in the network, or they can be closed and require actors in the network to be already identified. They identify Bitcoin as the best known existing us case for the distributed ledger.
In the paper, Santander’s fintech venture arm illuminated several disruptive features of blockchain technology:
- Transactions can be made to be irrevocable, and clearing and settlement can be programmed to be near-instantaneous, allowing distributed ledger operators to increase the accuracy of trade data and reduce settlement risk.
- Systems operate on a peer-to-peer basis and transactions are near-certain to be correctly executed, allowing distributed ledger operators to eliminate supervision and IT infrastructure, and their associated costs.
- Each transaction in the ledger is openly verified by a community of networked users rather than by a central authority, making the distributed ledger tamper-resistant; and each transaction is automatically administered in such a way as to render the transaction history difficult to reverse.
- Almost any intangible document or asset can be expressed in code which can be programmed into or referenced by a distributed ledger.
- A publicly accessible historical record of all transactions is created, enabling effective monitoring and auditing by participants, supervisors and regulators.
Santander indicated that various commercial banks, central banks, stock exchanges and major technology providers, like IBM and Samsung, are examining uses of distributed ledgers. They single out four fintechs, Ripple, Ethereum, Eris Industries and HyperLedger, for developing new ways to exchange data and assets enabled by the distributed ledger technology. Santander projected:
It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions.
Beyond cross-border payments and transfers, the Santander funding unit believes that blockchains will provide for “smart contracts” – essentially “computer protocols that verify or enforce contracts.” The smart contracts will lead to many other potential uses of blockchains that include securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises. For example, smart contracts over blockchains or distributed ledgers could automate pay-outs by the counterparties to swap contracts, overcoming frictions in current post-trade processes, providing an alternative technology for clearing and settlement.
Reducing operational cost will not be the only benefit to securities trading and other financial products. As Sandtander notes:
Distributed ledgers can increase investor confidence in products whose underlying assets are now opaque (such as securitisations) or where property rights are made uncertain by the role of central authorities.
Overall, the venture fund’s analysis forecasts that distributed ledger technology will reduce global banking infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.