“At a basic level, blockchain is a peer-to-peer
network of computers called ‘nodes’ that come
together to create a decentralized, distributed
digital transaction ledger. Through a series of steps,
the transaction records on the nodes become
blocks that are added to a chain. The chain has
established protocols that cannot be circumvented
or altered…No one entity has control over the
transactions the chain catalogues.”
we live. Similar to the internet, groundbreaking technology is rarely
limited to its original purpose.
Subsequent generations of thinkers and risk-takers tend to
repurpose inventions like the internet and blockchain for the
betterment of all. For example, e-commerce and social media were
likely not the primary objectives when the US Department of
Defense funded the development of the internet.
The core of blockchain technology is a combination of the
distributed, immutable ledger and cryptology that creates trust in
a transaction. One expert, Joichi Ito of MIT Media Lab, offers the
observation that “the blockchain is to trust as the internet is to
information.” Trust is the cornerstone of business transactions.
Transactions that have a low amount of trust are inefficient, take
more time, generally require intermediaries, and are more costly,
as there is a concern over performance.
When transactions are executed and settled on a distributed
ledger, counterparties don’t need to have an established relationship
to create trust. Each participant in the transaction trusts the
blockchain itself, and they don’t need to directly trust each other.
This opens new avenues of customers for businesses operating on
At a basic level, blockchain is a peer-to-peer network of computers called “nodes” that come together to create a decentralized,
distributed digital transaction ledger. Through a series of steps,
the transaction records on the nodes become blocks that are added
to a chain. The chain has established protocols that cannot be
circumvented or altered. The transaction record includes sender
and receiver pseudonyms, date and time, asset type, and the quantity of the asset. This means that no one entity has control over
the transactions the chain catalogues.
Access is also widespread which means that coordination of a
fraudulent alteration in the chain would be virtually impossible to
achieve, especially without detection. The transparency between
parties and immutability of record provide the “trust” that would
otherwise be ensured by intermediaries, such as banks and exchanges. However, it is done with fewer human steps that slow the
process, increase costs, and increase the likelihood of clerical error.
Some tasks that can take days, weeks, or months to complete, such
as overseas wire transfers and loan under writing, could potentially
have same-day expediency using blockchain.
Blockchain technology will have a vast number of applications,
both public and private. One of the most appealing applications
will be the development of blockchain-based smart contracts. The
automated, computable smart transactions are the root of what
is possible with blockchain. These smart contracts can be digitally
signed, computable, and self-executing. In this scenario, much of
a contract could be automated with the aid of a software agent, or
virtual third party.
The rules programmed into these smart contracts would allow
contractual obligations to be executed only when specific actions
have taken place. Again, by reducing the amount of human input
needed, the process is expedited and there are fewer fees. This has
tremendous potential for power, natural gas, crude, and refined
product industries as independent third parties can transact
without the need of intermediaries, clearinghouses, or
There are some very exciting early ventures into blockchain and
cryptocurrency development. Experts consider its development
to be at about the level of the internet in the mid-1990s, but its
continued development is advancing exponentially faster. Com-
panies like OpenBazaar, Ethereum, and Microsoft Azure have
provided blockchain development and applications. Nasdaq Linq
is on the frontier of providing for the transfer of shares of privately
held companies using a blockchain-based digital ledger.
Nearly 40 members ranging from CME Group to UBS have
joined forces to form the Post-Trade Distributed Ledger (PTDL),
which focuses on streamlining post-trade processing using dis-
tributed ledger technologies. Large banking, investment, payment,
and technology companies are getting involved in the movement
with total research investments in the hundreds of millions of
With all the possibilities, obstacles remain for blockchain trans-
actions to become mainstream. The significant computing power
required for networks is getting attention from environmental
groups concerned about a large carbon footprint. Blockchain
markets will also have to develop policies, procedures, and controls
for compliance with financial crime regulations, such Anti-Money
Laundering rules and Know Your Customer procedures. In addition,
since transactions can largely be anonymous, significant tax issues
could arise from the global nature of these transaction
Due to the exponential development rate and underlying potential, this is not a technology that a company will want to ignore.
The number of big banks and other institutions conducting extensive research and development provides evidence that the
mainstream adoption of blockchain technology is only a matter
of time. Having contingencies planned for different levels of development and adoption will be vital for the success of financial and
ABOUT THE AUTHORS
Shane Randolph is a managing director
at Opportune, overseeing risk management, derivatives, stock-based compensation, and complex securities service
offerings. Jim McBride is executive vice
president at QStar LLC.