Bitcoin 2.0 – ‘Blockchain’ platform to replace incumbent financial services providers

It has recently been reported that major UK brokerage Hargreaves Lansdown currently managing around £40 billion in client assets has launched a price war in the brokerage industry, signalling possible future savings for retail investors in particular.

It could be suggested that such a move may be premeditated to offset any negative PR in response to the upcoming Retail Distribution Review (RDR) in April headed up by the FCA. One of the reviews aim’s is to bring greater transparency to the brokerage industry’s widely used pricing model where trail commission is extensively used between fund manager and Brokerage as compensation for facilitating and promoting investments, in particular for popular Open & Close ended funds.

Whether or not the use of trail commission model is actually a negative for retail investors is debateable, however, whilst regulators and brokerages tinker around with pricing models, potentially a much greater problem for the brokerage industry and financial service industry is currently looming on the horizon. It’s a threat from the world of Bitcoin and crypto currencies and it could truly lead to increased competition and much lower prices for investors in the financial markets.

‘Bitcoin 2.0’ has recently been coined to describe the growing trend of alternate uses for the Bitcoin network protocol. The Bitcoin ‘Blockchain’ (the decentralised public accounting ledger) is essentially a massive distributed asset registration system and this technology may soon be competing with the current function of (CSD’s) central security depositories and international central security depositories (ICSD’s).

These systems currently facilitate the electronic settlement of securities all over the world and include banks and brokerages that act as centralised registrars for assets within these systems; where things such as the trade, currency for the trade, registration of asset ownership and tax payments are settled between registrars for a wide range of securities.

But just as Bitcoin has ushered in a new era of decentralised global digital currencies that facilitate frictionless, low cost, efficient transfer of value outside of the control of governments and financial institutions, there are ongoing projects under way to do the same thing with other financial assets.

Two prime examples of these are ‘Mastercoin’ and ‘Coloredcoins’ which are basically additional protocols that sit on top of the main Bitcoin network and provide additional functionality to the underlying network. The main purpose is to take small fractions of the Bitcoin currency to create tokens that can then be assigned different values and functions. These in turn can then be traded between individuals and companies. This could potentially lead to the total digitalisation and decentralisation of many services currently provided by financial institutions including:

  • Issuance and secondary market trading of Stock, ETF’s, VCT’s, Investment trusts, OEIC’s and CEIC’s, Corporate and sovereign bond.
  • Trading of Commodities
  • CFD, spread betting, derivative market (financial contract management)
  • Property and contract rights ownership

In any situation where proof of ownership needs to be registered or facilitated, these systems have the potential to remove the middleman and would therefore at the least provide increased competition and at the most threaten the very existence of brokerages and financial institutions that provide these services as a large part of their business model.

The benefits of this cannot be understated:

At the moment there are multiple CSD’s and ICSD’s that investment funds and companies have to be registered with on individual basis to make their financial product eligible for purchase and trading in that jurisdiction or region. With the decentralised method shown above the medium of trading and purchase will simply be through the internet. This has the potential to be one of the greatest examples of lean engineering ever witnessed.

For entities such as Investment funds or companies issuing stock or financial products, they instantly have access to a much larger global market, reduced administration costs and the removal of costs associated with the third party financial institution and it would also have the potential to decrease the time it takes to roll out financial products. All of this could potentially lead to reduced management fees and or lower spreads which again is another benefit to potential investors.

Other advantages to the investor is being able to be in essence, their own brokerage, which means they will not be paying the considerable fees that facilitate the overheads of the brokerage or financial institution. These include, buy & sell trading fees, exit fees, transfer fees, account closing fees, annual management charges for specific accounts. This frees up more capital that can be invested to further support growth and innovation. In addition the investor could easily have access to a much larger pool of investment markets and financial products that are often restricted through certain brokerages and financial institutions.

One other area that could be significantly improved is the integrity of the markets. It is no secret that since 2008 especially there have been multiple instances and revelations of market manipulation by the big banks in particular, including Libor manipulation that affected hundreds of trillions of dollars in assets benchmarked to this rate. Bitcoin 2.0 can provide triple entry accounting, completely eliminating the possibility of manipulation and alleged naked short selling that has been so prevalent in recent times.

There are significant challenges to overcome before such a system is fully developed and easily accessible for main stream use, one of which (besides technological development) is the navigation of the international regulatory landscape. However, it will hopefully bring much needed competition to a financial services sector that has become growingly complacent with archaic infrastructure, considerable fees and a severe deterioration in integrity.

We have already seen positive signs of remittance service providers dropping prices for sending money abroad, which could be attributed to the rapid growth of Bitcoin. Could Bitcoin 2.0 about to have the same impact upon other financial services in the near future?


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