Welcome to our first video on the financial services industry. Financial services can be very inefficient. Let's talk about six things blockchain can do better. Today's global financial services industry is built on decades-old technology, often slow and unreliable. It's centralized, exposing it to data breaches or outright failure. It tends to reinforce the status quo, and stifle innovation. There are six key reasons blockchain technology can bring about profound changes and bust up the current industries monopoly on financial services or cause them to change. Blockchain will give individuals and institutions like real choice in how they create and manage value. First is attestation. Two parties who don't know or don't trust each other can do business with assurance. Financial intermediaries can no longer claim the sole right to verify identity and establish trust. Blockchains trust protocol, as we call it, can establish trust when it's needed. It can verify the identity and the capacity of any counterparty through a combination of blockchain transaction history, crowdsource reputation scores, and other social and economic indicators. Second is cost. Blockchain eliminates vast back office expenses. On a blockchain, the network clears and settles transfers value from peer-to-peer in real time. Its ledger is always up to date. With that capability, banks could eliminate an estimated $20 billion in back office expenses according to the Spanish bank, Santander. Cutting those costs could mean that banks could offer individuals and businesses greater access to financial services, markets, and capital especially in underserved communities. Current participants would benefit, but so would scrappy entrepreneurs everywhere, anyone everywhere and anywhere with a smart phone and Internet connection could tap in to the global financial market. Third is speed. A blockchain network could clear and settle transactions in minutes or seconds, when it takes days through traditional channels. Today, remittances take three to seven days to settle. This is the global diaspora, people sending money back to their relatives in their ancestral lands. Stock trades take two to three days, and bank loan trades take on an average, a staggering 23 days. The global swift network handles 15 million payment orders a day. The US automated clearing house system handles trillions of dollars a year, but those payments take days to clear and settle. A blockchain network like, say, Bitcoin, takes an average of 10 minutes to clear and settle transactions conducted during that period. Other blockchain networks are even faster. Innovations like Bitcoin, Lightning Network aim to vastly increase capacity, dropping settlement and clearing times to fractions of a second. Ripple Labs' Chief Executive Officer, Chris Larsen, said, "In the banking world, where you have a sender in one network and a receiver in another, you have to go through multiple ledgers, multiple intermediaries, multiple hops." He's right, things can fail right in the middle. For each intermediary, there's a counterparty risk, there's a cost, and there's a delay. Shifting to instant frictionless transfers would free up capital, otherwise, tapped in transit. There would be no delay because a clearing and a settlement is the same activity, it's just a change in the ledger. Well, that's bad news for anyone profiting from the float. Fourth is risk management. Blockchain promises to ease several forms of financial risk. There's settlement risk, if some technical glitch blocks your trade. There's counterparty risk, if you're trading counterpart defaults before settling, and that's what almost caught us in 2008, and the most significant is systemic risk, the sum of all counterparty risk in the system, this is also known as Herstatt risk. A crisis occurred when German bank Herstatt couldn't meet its liabilities and had shutdown. The financier, Vikram Pandit, said, the crisis revealed a significant risks. He said, "If I'm trading with somebody, how do I know they're going to settle on the other side?" According to Pandit, instance settlement on blockchain could eliminate that type of risk completely. Accountants could look into a company's inner workings at any point in time, and they can see which transactions were occurring and how the network was recording them. Blockchain would also eliminate the risk of shady managers, exploiting the length, the paper trail and time delay to hide wrongdoing. The fifth advantage of blockchain is value innovation. Developers are coming up with a multitude of ways to define and trade value on a blockchain. The Bitcoin blockchain was designed to move bitcoins, not really other financial assets. But this technology invites experiments, and innovators are building alternative blockchains for purposes beyond simply making Bitcoin payments. Someone to use Bitcoin blockchain size and liquidity to create spin-off coins on sidechains. These spin-offs can be colored to represent any asset or liability, physical or digital. They could be a currency, a corporate stock or bond, a barrel of oil, a bar of gold, just about any asset, a car, a car payment, receivable, payable. Others are trying to remove the coin or token from the picture, building trading platforms on private blockchains. Financial institutions are already using blockchain technology to record exchange and trade assets and liabilities, but there's potential for far more. The sixth is open source. Blockchains nimble nature means it can keep on adapting to future needs. The financial services industry is like a towering stack of legacy systems, may be on the verge of falling over. Changes are hard to make because each improvement must be backward compatible. As the saying goes, God may have created the world in six days but he didn't have an installed base. As open source technology, blockchain can constantly innovate and improve based on consensus in the network. These six benefits, attestation, far lower costs, lightning speed, lower risks, greater innovation of value, and greater adaptability may transform more than just payments. They may transform the securities industry, investment banking, accounting and auditing services, venture capital insurance, enterprise risk management, retail banking, and other pillars of this industry.
