Writing on Quintessence, the financial magazine of BNP Paribas, financial securities research analyst Johann Palychata analyzes the possible impact and future implications of the blockchain for securities markets. He believes that Bitcoin is really an innovation and a disruptive open-source technology for the financial world.
“Its core is the first successful attempt for a secure and decentralized register,” says Palychata. “It should be considered as an invention like the steam or combustion engine. ”
BNP Paribas, a French bank headquartered in Paris that was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in 2000, is one of the largest banks in the world. Based on 2012 information BNP Paribas was ranked as the third-largest bank in the world, as measured by total assets, by Bloomberg and Forbes.
Though Palychata’s opinions shouldn’t be interpreted as an official position statement from the bank, publication in the official BNP Paribas magazine lends them a certain official aura.
Palychata considers two possible scenarios for blockchain-based securities markets.
“The first scenario creates a total disruption. In its purest form, a distributed blockchain system allows all market participants direct access to the DSD (Decentralised Securities Depositary), to the exchange and to the post-trade infrastructure (clearing and settlement),” he writes. “If this setup develops then existing industry players might be redundant.”
It’s surprising that a representative of a major bank even considers the possibility of this scenario, which would be a nightmare for the financial establishment. However, Palychata continues, “given the challenge of keeping the private key of the account safe, it is possible that investors will entrust an authority to safe-keep the private keys. It is also possible that custodians will be responsible for the application layer over the blockchain or that they will launch their own network.
“The second scenario is an integration within the post-trade ecosystem,” he says. “The distributed ledger might only be the next generation of IT infrastructure. In this scenario custodians or settlement infrastructures might use the blockchain to record the ownership and trades between themselves; however, end investors will still need to use a custodian to have access to the market.”
It appears that this second scenario is becoming closer with the recent initiatives of companies such as Nasdaq and Overstock. Nasdaq partnered with San Francisco-based bitcoin API startup Chain to implement blockchain technology in its Nasdaq Private Market. And Overstock became the first company to offer qualified buyers the option of purchasing corporate bonds that will trade using Bitcoin’s blockchain protocol.
“The ledger will only be accessible to authorized market participants,” Palychata continues, exploring the second scenario. “Existing actors will remain in charge in this scenario. However, their level of service could change and they may deploy new services that they could not in the past because the investments required were a huge barrier to entry.”
Previously in November, Palychata published an article arguing that bitcoin and other digital currencies could shake up traditional banking and financial services. PYMNTS noted that Palychata’s article, which publicly suggested that “the development of an alternative to the current banking system is under way,” was remarkable because it came from one of the world’s largest banks.
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