The impact of blockchain is only beginning to be felt throughout organizations. How will blockchain impact the future of treasury? Andy Fately shares his thoughts.
How will blockchain-based financial tools fit into the traditional understanding of finance? By itself, finance is an elusive concept to describe. From company to company, finance can mean anything from liquid resources to a scientific study of funds and global trends.
Yet one definition captures several elements worth exploring. Finance includes the circulation of money, the granting of credit, the making of investments and the provision of banking facilities. To a corporate treasury department, these are their collective charge. These qualifying factors appear to be fruitful ground for study and form a hypothesis of how blockchain may impact the financial sphere.
CIRCULATION OF MONEY
Of the four features, money is the one that has changed most due to advances in technology. It is easy to point to the advent of cryptocurrencies and describe them as the ‘new’ money. But it would also be premature to do so. Money has a very specific definition; it must serve as a unit of account, a medium of exchange and finally, a store of value.
Using Bitcoin as an example, and working in reverse, a cryptocurrency might be considered a store of value, albeit an imperfect one. Based on Bitcoin’s demonstrated volatility, no one would consider it a safe store of value. Furthermore, regardless of how much crypto enthusiasts discuss their holdings, they are always converted into fiat currency amounts. By this qualifying factor, it would be incorrect to define cryptocurrencies as money.
Traditional money, however, has changed a great deal over time. Moving from paper currency to digital representations has enabled payments to be made quickly and more efficiently with less risk of theft. As well, allocation and segregation of funds is far more timely and secure.
There is every reason to believe that blockchain technology is going to continue that trend, reducing the time lags from hours and days common today, to seconds or minutes in the future. It’s even viable that there will be an eventual tokenization of fiat currencies by national central banks, which will require blockchain, though admittedly that is still a hazy prospect.
GRANTING CREDIT AND PROVISION OF BANKING FACILITIES
It is hard to separate these two features of finance as, historically, banks have been the primary grantors of credit to borrowers. In fact, lending money is half their mission statement, which is generally defined as ‘taking deposits and making loans’. There has been greater caution in the utilization of new technologies in the credit granting business, with arguably credit scores and agency ratings the most recent changes.
A fair question is, which technology will have the greatest impact going forward? Of the three natural candidates, artificial intelligence (AI), machine learning (ML) and blockchain, right now blockchain is the only one getting serious consideration in this area. A survey of bank announcements demonstrates that AI and ML are seen as having the most potential to impact customer service or risk management. Credit allocation is not even a consideration.
On the other hand, because of its inherent characteristics, blockchain is likely to have a much different, and more disruptive, role in the granting of credit in the future. It has the ability to lead to the democratization of lending by expanding the nascent peer-to-peer (P2P) lending networks that already exist, as well as enhancing banks’ ability to improve their lending process.
P2P lending is already gaining traction with numerous companies competing in the space. However, at this time, it remains focused on personal and small business loans. It is also an extremely small slice of the overall lending market. The latest estimates indicate that as of 2015, the total global P2P loan books were ~$64 billion and an analysis by Statista forecast that to grow to $1 trillion by 2025. In contrast, according to the Bank for International Settlements (BIS), as of the end of Q1 2018, total bank credit to nonfinancial counterparties totaled $69.9 trillion across all currencies! So at this stage, P2P lending is still a tiny fraction of the loan market.
BLOCKCHAIN IN CORPORATE TREASURY
Looking ahead, there are three significant ways blockchain technology can impact corporate treasury:
- Cash management: Blockchain has the power to disrupt many aspects of this process; in investments, by reducing the time and resources necessary to insure investments are made when and where desired with limited human intervention; and in payments, by enabling a more efficient payment systems for corporates, whether to enable vendor payments or move cash internally.
- Credit: One of the trends in the wake of the financial crisis in 2008 was the significant buildup of cash on corporate balance sheets. Corporate treasurers are tasked with the offsetting goals of highest returns with least risk. The development of blockchain-based systems that enable P2P lending may be exactly what is necessary to achieve that dual mandate.
- Money: Banks are developing highly specific products on a private blockchain designed to represent specific values of fiat currencies and not to have their own underlying market. For treasurers, this means it is critical that better cash management information is available internally, as well as proper investment and payment guidelines are put in place for the future. The benefit will be reduced risk of non-market loss.
AN EVOLVING PROCESS
Looking ahead, blockchain is ripe to enhance the speed of transaction settlement, reducing errors and saving significant costs in the operational aspects of investment. It is the perfect vehicle to change settlement timelines, which are currently more appropriate for paper documents than for the digitized world in which we live.
Finance as we know it today will continue to evolve as technology improves. Blockchain, in particular, is certain to be a major element that will shape and direct the finance industry for many years to come.
Andy Fately is Chief Strategist, 9th Gear Technologies. AFP’s 2018 Technology Survey examines the landscape of emerging technologies and their current and anticipated impact within treasury and finance. Read more here.