More precisely, financiers are interested in the information system underlying bitcoins: the blockchain, a distributed ledger that everyone can access but which no single user controls. The record of every bitcoin transaction is preserved in the computers of the participants, and is updated with every new entry. This greatly reduces the risk of fraud and errors because the only way to tamper with the distributed ledger would be to seize control of most of the computers holding the blockchain in their memories.
Enthusiasts also argue that blockchain allows for the direct transfer of ownership of securities almost instantaneously. Encrypted, digital representations of share certificates could be inserted into minute bitcoin transactions, facilitating an immediate, verifiable transfer of shares from seller to buyer.
Nasdaq is trialling blockchain in its Private Market, a platform for trading shares in tightly held private companies. The hope is that blockchain will enable trades to be cleared in less than an hour, compared with the laborious process that requires three days for shares, and up to several weeks for more complex financial products.
Some see blockchain as the key to achieving the longstanding dream in the securities market of achieving real-time settlement. This would help reduce risks that counterparties will fail to complete the transaction, as well as freeing up billions of dollars that are tied up during the settlement period.
Banks back transfer project
For the world’s capital markets, where assets worth hundreds of billions of dollars are swapped daily, blockchain technology also offers the potential for huge savings by replacing laborious back-office processes.
Not surprisingly, more than 20 of the world’s largest banks, including Goldman Sachs, JP Morgan, Credit Suisse along with Australia’s Commonwealth Bank and National Australia Bank, are backing a project aimed at developing common standards for a system that banks might use to transfer funds or information.
The major global banks will provide data, ideas and financial backing to a New York-based start-up called R3CEV, which hopes to create a blockchain framework to use in the financial industry.
NAB chief executive Andrew Thorburn last month described the project as “an opportunity for banks to learn together about something that could have a very significant impact on our business in future years. It could be a virtual banking system”.
The digital currency also scored a major victory last month when Europe’s highest court ruled bitcoins should be exempt from value-added tax in the same way as banknotes and coins.
With or without a Nobel Prize, Nakamoto can console himself with the idea that bitcoin is now on a more equal footing with mainstream money.