Public distributed ledgers like the blockchain supporting bitcoin have drawbacks that make them unsuitable for financial firms' needs, according to analysts from Corporate Insight. The research firm hosted a webinar on Tuesday outlining the findings of a report released in February detailing how private distributed ledgers could be adopted by financial services firms.
For one, according to Jen Butler, an analyst at Corporate Insight, public ledgers are typically anonymous, which makes it harder for firms to satisfy know-your-customer and anti-money laundering regulations.
Private ledgers are "much more common in financial services firms," Butler said, because they allow them to identify participants and assign access levels based on that person's role. "One firm may be able to read the details of the transactions" that occur on the ledger, she said, while "another might be able to read the details and transact or vote on the validation of transactions."
Distributed ledgers can't execute transactions on their own, Butler explained. "They have to rely on some type of third-party database or engagement from participants." Frequently, that means smart contracts, self-executing code that exists on distributed ledgers and represents the agreement between parties, she said.
"Once certain conditions are met, the code self-executes," she said.
This technology can be useful to firms that rely on intermediaries, said Alisson Andrade, senior analyst at Corporate Insight, because they eliminate costs of those intermediaries, as well as redundant back-office processes.
"The technology can also increase security through its advanced cryptography and distributed ledger structure," she said.
Although there has been a decline in investment in blockchain firms since mid- to late 2015, according to CB Insights, blockchain providers received the highest level of funding since 2014 in the first quarter of 2016.
Although venture capitalists have shown waning interest, large institutions are still funding the technology, Andrade said. "We do believe the industry is still very much interested in blockchain, and we believe that the firms that invested early on in blockchain are currently testing out the technology."
Butler added that once those testing projects are completed, revenue and additional investments are expected to increase.
"The financial sector is not typically the most agile," Butler said, but she noted that financial regulators in the U.S. appear to be taking a "laissez faire approach." In December, the Federal Reserve released a paper on blockchain that lacked any recommendations for how firms might adopt blockchain, she said.
In the U.K., though, the Bank of England has developed a fintech accelerator program to test blockchain use cases, and conducted research on the impact of a central bank digital currency, she said. Central bankers in Singapore have been testing their own digital currency for interbank payments, Butler said.
Nasdaq started testing a private ledger blockchain and in December 2015 released Linq, which allows private companies to trade shares prior to an initial public offering. The ledger reduced trade settlement time and eliminated paper stock certificiates, Butler said.
A year later, Overstock released the first publicly traded shares on a distributed ledger.
