Blockchain and the Future of Financial Services

“Blockchain technology will revolutionize the ­­­­__________ industry.”

The above sentence, with the appropriately filled in blank, has been written thousands of times on internal business plans, white papers, and thought leadership pieces across the globe. As with all powerful emerging technologies, there are extreme case predictions (positive or negative), equivocation, warnings of unforeseen and unappreciated risks, and self-serving hype. It seems highly probable that blockchain will impact how financial services are delivered; the real questions are the magnitude and timing of the changes.

This paper will discuss blockchain technology in general; specifically ways in which it might impact the financial services industry, particularly brokerage and custody services. The purpose is not to provide a full technical understanding of blockchain, but to convey enough information to understand why it is so potentially impactful, and list some of the difficulties that might be attendant with its implementation.

Dean L. Kamen an American engineer, inventor, and businessman who is best known for his invention of the Segway, said this:

“Every once in a while, a new technology, an old problem, and a big idea turn into an innovation.”

If, in Kamen’s formulation, blockchain represents the “new technology” then what are the “old problem(s)”? There are several, but the most important problems addressable by blockchain are:

  1. Security of data – including the ability of parties to quickly agree on data accuracy
  2. Quick resolution of disputes between parties regarding the facts of a transaction
  3. Assurance that contractual obligations will be fulfilled promptly and with minimal cost
  4. Ability to ascertain true ownership of tangible and intangible assets

There is an important distinction between two types of potential changes from the use of blockchain technology. The first is a change in operations – how and to what extent will blockchain alter the industry’s existing processes. The second is a change in business – how might blockchain alter the underlying activity of the entities involved in some fundamental way. Discussions regarding this second change are by definition likely to be more speculative.


At its simplest, blockchain is a technology to structure, store, and transfer data. Blockchain uses a “distributed ledger” that decentralizes data; radically different from centralized database framework that is the backbone of most modern information systems. Some authors use the terms “distributed ledger” and “blockchain” interchangeably, though technically the first term describes the structure of the second. The structure of blockchain seeks to solve problem #1, data integrity.

There are two components of the blockchain technology, the “block” and the “chain”. The “block” refers to a package of data. In financial services, this is data such as purchase price, a quantity (such as number shares), transaction date, and the identity of the parties in the last transaction to indicate the rightful owner. However, the data within a block can be anything, quantitative or qualitative, and theoretically, of any size. A block could contain the number “1” or the entire contents of the 2010 U.S. census. It is also possible to include computer programs as part of the datablock. The ability to programs allows blockchain facilitate self-executing contracts, or smart contracts, potentially solving problem #2 and discussed more fully below.

The “chain” aspect of blockchain is created by the use of a “hash” as a component of each block. A “hash” is a code for that represents underlying data on the block. A key aspect of blockchain is that “hashing” converts all data, regardless of size or format, into a standardized format. A previously agreed on algorithm performs this process. Each block also has a “pointer” that refers to the next block, as well as to the “hash” of the previous block. These interlocking “hashes” form the “chain.”

For example, bitcoin uses the Secure Hashing Algorithm SHA 256, which represents all data as a 256-bit code. For example, the word “Blockchain” results in a hash of “625da44e4eaf58d61cf048d168aa6f5e492dea166d8bb54ec06c30de07db57e1.”

One important feature of blockchain is that permissioned ledgers can be granted “read only” or “read/write” status. Interested third parties could be given a “read only” version of the ledger, without the ability of adding new blocks to the chain. These parties could be accountants, regulatory, taxation or similar authorities.


One of the significant advantages to blockchain technology is its resistance to hacking. In most computer systems, defense against malfeasance comes from adding protective layers of security around the data in the form of firewalls and increasingly complicated encryption algorithms, leading to the proverbial “arms race” between the hackers and the defenders. This system is also requires end users to be active soldiers in this war, forced to remember periodically update multiple passwords (ironically, this desire for security can make systems less secure – for instance, “password” is the most common password).

With blockchain, the security of the system is integral to the distributed ledger design. First, if someone changes the data on a given block, there will automatically be a mismatch between that block and the its immediate predecessor, breaking the chain. Furthermore, with a distributed ledger, there is no master database vulnerable to attack; everyone with permission to the ledger has a continuously updated copy of it, hence the term “distributed.” The system is self-defending, or perhaps self-inoculating. Note, this applies to the integrity of the data itself; it does prevent unauthorized people from stealing data.


Consider a traditional brokerage account – the broker maintains the master ledger, and exchanges with the client information on each transaction (trades, deposits, withdrawals, interest and dividend payments, etc.). The client creates a duplicate ledger. The audit process reconciles any disputes between the master and client ledgers, costing time and money. This process may be simple enough for a household or small business, but daunting for a multinational corporation or financial institution. The system itself is vulnerable to malfeasance, or even simple error. Hack the central database and millions of records can be corrupted. For instance, The TV show “Mr. Robot” portrays a chilling, yet seemingly plausible, scenario in which a financial/industrial conglomerate has its records destroyed by an anarchist collective. Much of the subsequent plot involves the attempt to recreate the massive database using paper records.

The real time and distributed nature of the ledger solves one aspect of the 3rd problem identified in the beginning of this paper, how disputes get resolved. The system has built in protocols to resolve conflicts among ledgers, which computer scientists refer to generically as the Byzantine Generals Problem. These protocols do not determine which version of the ledger is “right” but focus strictly on how to handle conflicts. For example, NASA uses a protocol where multiple computers monitor the same data set. If just one computer reaches a different conclusion from the others, that computer is ignored. But if two computers are out of consensus, corrective action, typically the cancelation of a scheduled activity, will be taken. Hackers would have to alter multiple ledgers simultaneously to corrupt the system. While technically possible, infiltrating a number of systems at the same time is significantly more challenging then infiltrating just one.

Briefly stated, the Byzantine Generals Problem references a number of generals surrounding and about to attack a city. A majority of the generals must attack in order to be successful. But communication among the Generals is difficult. Each general must be confidant that the order to attack is valid and not a ruse from enemy spies. Computer scientists use this as a model for creating solutions and fail-safes for systems.  Perhaps the most famous example of the Byzantine Generals Problem was the May 13, 2008 cancellation of the U.S. Space Shuttle launch when the computers began disagreeing with each other.


Using a distributed ledger could eliminate much of what we now think of reconciliation and audit (according to Audit Analytics, costs for financial services audits approach .1% of gross revenue, the potential savings across the industry is measured in billions). Blockchain works in real time, whereas traditional systems typically work by batching data collected over time together. Its real time nature makes it a part of, and may supersede, existing Straight-Through Processing (STP) systems. In May 2017, Nasdaq and Citi Treasury and Trade Solutions (Citi’s institutional cash management service) announced that they would use blockchain to facilitate payments and transactions, specifically citing the advantages of real time processing using blockchain.

Distributed ledgers may ease the burden of regulatory and tax reporting. Ledgers could be shared between companies and their accountants, effectively allowing real time auditing. Preparing tax documents could be simplified, since basic information such as transactions dates, transactions prices, and conceivably corporate actions and dividends could also be part of information carried on a block. Regulatory bodies and taxing authority could be granted “read only” permission ledger access. Though this may have highly concerning “big brother” implications, it also suggests that compliance and other regulatory violations are more likely to be caught in real time. The focus of regulatory bodies could truly be ensuring compliance with regulations, rather than imposing sanctions after the fact. The same would hold true for tax disputes. Reduction of compliance penalties could provide significant cost savings.

Legal disputes, either between private litigants or regulatory bodies would become easier to resolve (and therefore less frequent) because there would be fewer disagreements on the facts of a case. Much of the discovery process in civil litigation would be obviated if each side had access to the same ledger, leading to faster legal process and easier settlements. Discovery costs are estimated to represent 20-25% of the total cost of civil litigation ( reducing these could represent significant savings in major litigation.

Blockchain is already gaining traction to augment or replace many traditional back office functions. On December 7, 2017, the Australian Stock Exchange announce that it would be the first major stock exchange to convert to a blockchain based system to record and process equity trades. On December 12 2017, Vanguard announced that it would use blockchain technologies would be used to help manage their index funds, presumably using smart contracts, in order to reduce costs.


Blockchain could expand the types of assets traded by both improving settlement timing and increasing accuracy of assessing asset ownership. This would require significant regulatory changes, as well as broad agreement among participants regarding technological standards. However, the possibility of some of this expansion, combined with some of the early actions taken to make them a reality makes exploring new types of traded securities worth exploring. These issues as a solution to what was identified as problem #4.

Because each block can carry such a wide variety of data, ownership information, including beneficial ownership information, could also be conveyed with each block. If a block carried full ownership information, this could blur or even eliminate the distinction between nominee and street name. Transfer agents, already increasingly an anachronism, could become unnecessary. Blocks could also include information such as proxy voting, share restrictions and registrations, and insider holdings. Insider trading disclosures (13d and 13f) filings could be done in real time (or nearly so) increasing market transparency and making insider trading more difficult.

Faster Settlement and Greater Transparency – A result of blockchain implementation that would benefit all the asset classes listed below is faster settlement. While settlement is standard for most stocks and bonds, there are asset classes where settlement delays and issues have prevented the creation of a truly liquid market. In all the cases below, blockchain has the potential to speed settlement by ensuring accurate and timely recording of ownership (and in some cases liabilities), source of repayment, collateral, special conditions or other aspects of the security.

The concept of smart contracts has application in a number of blockchain uses, but settlement issues are the ones that may be the clearest. Smart contracts on blockchain work on an “If-Then” basis. If a condition is satisfied (a payment received, an item is delivered, etc.) than a subsequent action (a payment may be released, an encryption code to another piece of software will be delivered, etc.) will then take place automatically. The conditions could be negative, if a payment is not received by a certain time, then a given action will or will not take place. Smart contracts could effectively automate the settlement process. Smart contracts are used by the ethereum cryptocurrency, the second most widely used after bitcoin. There are nearly 1000 applications being used within the ethereum technology (an updated list and links to these apps can be found at

Active ETFs – Blockchain’s real time nature should be a boon to firms creating actively managed ETFs. The ability to provide a continuously updated list of securities to a small number of trusted partners (brokerage firms, custodian and administrator) seems tailor made for blockchain. Should this technology be developed, and with necessary regulatory approvals, actively managed ETFs could truly supplant traditional mutual funds, necessitating a major change in the industry relative to commissions, trails, and other fees.

Real Estate Equity and Debt – Perhaps the industry most potentially impacted by use of blockchain is real estate. Though it’s location does not change, ownership interests are exchanged, as well as claims against the property for mortgages or other debt. Easements may be granted, zoning rules change, flood plains redefined, etc. Property improvements can be made, structures erected or destroyed. Each of these events must be recorded in some way, then be re-researched and reconfirmed before each transaction. Blockchain could represent each property by a block. The current status and history of the property would be available to all who were permissioned. Due diligence on commercial real estate could be sped up, with each tenant and the terms of each lease recorded on a blockchain for easier analysis. Blockchain could substantially improve the speed and accuracy of the title searches. In may ways, blockchain could improve the liquidity in the real estate market.

This sounds (and probably is) fairly futuristic. However, Sweden is providing a possible model for development, where technology consultants, banks, and the government land authority have created a pilot program to set up a blockchain real estate registry. Ironically, blockchain may be most useful in developing market countries in which real estate transfer is almost entirely a manual process, unlike in the developed world, which already incorporates technology.

Using Blockchain could make the buying and selling of real estate much faster and safer. If blockchain does effectively eliminate issues of clear title and ownership interests, why couldn’t shares of the building on the corner of State and Main trade just as easily as shares of the business that operates there? The equity of the property could be divided into units (shares) and traded freely. While this idea is clearly a long way off, blockchain at least makes the idea technologically feasible.

Other Securitizations (including CDO and CLO) – Currently the securitization process requires an entity (typically a large custodial bank or brokerage firm) to aggregate a series of cash flows, primarily from mortgages, but also from consumer loans, credit cards and other sources. Keeping track of each debt obligation, its cash flows, maturity, collateral (if any), and information on the debtor is a major undertaking. The weaknesses in the system became evident during the financial crisis, as investors struggled to see through these bundles of cash flows to determine the worth of the securitized (traded) instruments and the underlying collateral.

Securitization requires that distinct types of parties have the same information. These include the owners of the security, the servicing agent, and the any manager of an actively managed CLO, CDO or similar instrument. The record keeping process here is onerous, limiting what can be securitized and the liquidity of the resulting instrument. But if the relevant parties have instant simultaneous access to all pertinent information necessary for both servicing and valuation, it would greatly increase the liquidity in the securitization market, perhaps allowing for a greater number of securitizations.

Private Equity – Private Equity appears ripe for re-invention by blockchain. By definition, private equity is not traded on an exchange; there is no independent recorder of investor interest or transactions. This responsibility usually falls to the company itself. Use of blockchain could ease the burden on smaller companies seeking to issue limited shares to the public. Already the government of France (hardly a country on the vanguard of financial liberalization) passed a law allowing some trading of unlisted securities on blockchain networks.

Other Assets – Assuming that blockchain is successful in conveying information on ownership of an asset (physical or intangible) and any restrictions on that ownership, theoretically, is there anything that cannot be traded? For example; physical commodities could be bought and sold at various points in the transportation and production chain. The information block could provide a quantity extracted, by what company, who it was bought/sold to and at what price(s), and information on where it will ultimately be sent to market. Smart contracts could facilitate transactions, and enforce delivery or other obligations. Gold may be the most likely commodity owned this way, as individual bars or ingots could be identified, with this information recorded on the datablock of course, but other commodities could be traded as well. Over time, this may reduce reliance on the futures markets by both hedgers and speculators if blockchain supports trading in the physical market.


It is relatively easy to make the “bull case” for how blockchain can disrupt the financial services industry and provide cost savings. By one estimate, blockchain will save the global financial services industry between $15-$20 billion per annum (The Fintech 2.0 Paper: rebooting financial services; Oliver Wyman, Santander, Anthemis Group).

However, will the blockchain promise be delivered? Blockchain raises several key issues:

  1. Standardization – Since no one owns blockchain, the global financial community, major technology companies, and global regulators, are going to have to agree on standards regarding the algorithms used to create the “hashes” as well as how rules for granting access and permissions to the ledger. They will also need to agree on what information will be contained on each block. Having different participants imprint the blocks with different information would reduce or even eliminate these efficiencies.
  2. Data Storage – One of blockchain’s strengths is that everyone permissioned has the entire ledger to ensure data integrity. But the downside is that everyone has the entire ledger, regardless of what piece(s) of information is needed, or whether the information is stale. This suggests a massive increase in data storage requirements, much of for data that will eventually become irrelevant. It is likely that there are going to have to agreements on dropping data off the block, either based on the number of transactions or some measure of time.
  3. Speed – While blockchain may speed up the settlement process of securities, actually trading could be much slower. The key to blockchain is the near instantaneous updating of all ledgers, but that process itself is time consuming relative to the speed of securities trading. Even in a simple stock sale, there may be many ledgers (the buyer’s, the buyer’s broker, the exchange itself, the seller’s broker, the seller, any accountants/lawyers/regulators, etc.) This might not be a problem for longer-term investors. But for the high frequency traders that dominate so much market activity, having blockchain technology incorporated into the trading systems an insurmountable speed bump.
  4. Integration – In addition to the costs of installing the blockchain technology, financial firms are going to have to integrate blockchain with existing systems, including trade order management and client reporting. Some in the Fintech community suggest that one benefit to blockchain is forcing companies to finally get rid of legacy systems, as blockchain will make them antiquated and redundant. It is unlikely that many Chief Information Officers are willing to make such a commitment to what is still a new technology. It is hard to estimate the costs of this conversion. As a reference, it is estimated that the United States (government and corporate sector) spent approximately $100 billion on fixing the Y2K problem, in late 1990’s dollars.
  5. Data Security – Many of today’s current issues regarding allowing access to data would still apply; Blockchain would not necessarily prevent the falsification of permissions, leading to the misappropriation of private information.
  6. Loss of Privacy – Ironically, this is an area of concern. One of the attractions of blockchain is that allowed users to remain anonymous, allowing for bitcoin use for a number of highly unsavory activities. However, any information on a block is visible to every entity that has access to the ledger, even if they only have a legitimate interest in a portion of the data.


As with any powerful new technology, the possibilities for blockchain are nearly endless. Some will come to pass, others won’t. What are the most likely uses, shorter and longer term for blockchain?

The “easy wins” for blockchain will be ways to immediately improve back office efficiency. Given the degree of coordination among parties, the most likely early applications will be those that strictly internal or with just a handful of major parties. The recent actions taken by Vanguard on internally managing portfolios, or the agreement with Citi and Nasdaq (just two parties) are models.

Brokerage firms could partner with other broker/dealers, the exchanges (NYSE, Nasdaq), and technology vendors to use blockchain to improve security and trade processing. As a second step, client reporting software providers could be granted “read only” status for ledgers to improve efficiency and provide greater security. The real time nature of blockchain would make year-end client tax reporting much faster, leading to increased customer satisfaction. Finally, use of blockchain could extend to CRM systems, integrating the entire middle and back office process.

One area for exploration is the use of blockchain for collateralized lending, including securities lending itself. Blockchain would allow a lender and a custodian secure access to a client account and value of any collateral. Smart contracts could monitor regulatory ratios – triggering notifications, or even portfolio actions, should there by changes in collateral value or events such as ratings downgrades.


While a long way off, it is worth discussing the potential changes to the long-term business model for traditional banks and brokerage firms. Two major questions, “Does blockchain eliminate the need for having an entity to custody assets?” and “Can blockchain supplant to unique functions of traditional broker/dealers?”

What does a custodian (including a brokerage firm providing custodial services) do? At the core, custodians provide records of ownership of assets, tracks transactions, corporate actions, and accounts for cash due to dividends, interest, fees and other transactions. Custodial banks maintain the master ledger for their clients, as well as prepare tax and regulatory reports and similar record keeping services. Brokerage firms also provide these services, as well as effecting the transactions of any securities. How might effective implementation of blockchain impact these functions?

Record Keeping – The potential impact here is most obvious. The core element of blockchain is the distributed ledger. If everyone has their own ledger, along with an incorruptible history of all transactions, what value is the core record keeping function of a custodian? Why couldn’t a person just use a digital wallet to “hold” their blockchain-enabled account. This is not to say that there are no other services that custodians provide beyond record keeping. However, if the value of their core services can be diminished, it is likely the same technology can diminish or replace the value of these services as well.

Effecting transactions – Blockchain does not, by itself, eliminate the need for traders, market makers, exchanges or other components of the modern trading system. However, blockchain when combined with ECNs and algorithmic trading, is likely to reduce the value of this service. Already, most brokerage firms funnel trades to electronic marketplaces. With the exception of large or complicated orders, there is relatively little value added action by brokerage firms. Blockchain might push this even farther.

There is no technological reason why put a security to be traded is placed datablock, perhaps with price limits and time constraints, and that datablock is put on a trusted network of algorithmic traders. Smart contracts embedded in the datablock could facilitate the transfer of securities and cash once the preset conditions are met, i.e., a counterparty ascent to the transaction. Once the datablock has been fully updated (because the transaction has been completed or the time limit has expired) it would then create a new pointer back to its previous “hash.”

This scenario is not that far away from how some large hedge funds, mutual funds, and ETFs place orders now. All blockchain does is facilitate the record keeping. This could reduce trading costs further for institutions. This possibility raises other issues, including:

  1. How does further fee pressure on traditional investment banks change the market for investment research?
  2. Will blockchain create a two-tiered market, for those with and without access to the technology? Costs for smaller investors may rise if large institutional players can completely go around the traditional brokerage system.
  3. Will the concept of a prime broker continue to exist, given that it will easier for large traders to bid out the functions currently performed by their traditional relationships?


The logical conclusion of blockchain supplanting some traditional custodial features is the use of the technology to facilitate Unified Managed Accounts (UMAs). UMAs combine all of a client’s assets into one account, allowing individual, joint, IRA and other accounts with common ownership to be viewed together. While UMA’s have become more common, they are hardly universal. Blockchain could speed their adoption.

One potential issue is different taxation of income from or capital gain/loss on the sale of a security. Currently, taxation is determined by what account a security is assigned to; inside or outside of a qualified account. Blockchain could make that distinction at the security level, embedding the tax treatment of the security in the datablock at the time it is purchased. Having the type of “account” a security is held in as just another piece of data is consistent with the simplicity of using a UMA. Smart features on the block could trigger (or block) any tax consequences based on how the security is coded.

Blockchain may also solve “sleeve-level” reporting. “Sleeve-level” refers to the issue of how to track the performance of individual managers who may be trading securities for a client in a UMA. The structure of a UMA makes performance attribution difficult. For example, two managers may hold the same security, though with different purchase and sale dates, different cost basis, and possibly different tax treatments. The UMA manager (an overlay manager) could assign 100 shares to Manager A, and 200 shares to Manager B, with this information included on the datablock. Many UMAs also use a tax overlay, which may modify instructions from a manager based on tax considerations, effectively becoming Manager C. Performance attribution could be transferred across the different managers by updating the datablock, creating constructive “transactions” between managers in the program, including price activity. Performance of the various managers could then be computed simply by looking at the securities assigned to them.

Combine the two above concepts and not only could sleeve level performance be more easily computed, but this would increase the ability to compute after tax performance, on a total and sleeve level basis. After-tax performance reporting has been the Holy Grail for many service providers. Blockchain’s transparency and flexibility may allow for easier reporting. Permissioned ledgers to 3rd party service providers would increase the security of using the system, and as always, the ability to view activity and positions in real time should assist in this process.


By definition, considerations about new technologies are always somewhat ethereal. There are lots of details to be worked out by subject matter experts in technology and operations, as well as ever present compliance and legal complications. Blockchain is so powerful it has the potential to impact every component of the financial services industry, both the how and what companies do. Not all will come to pass; and many of these changes will take years to develop. Continued thought about how the technology works, as well as the results of the initial forays into actual use of the technology, will provide greater clarity into blockchain’s future adoption.


There are many places for information on blockchain technology (for example, information such as whether and where shares are registered, information on the dividend calendar, debt covenants and similar information could also be included on the block).

Here are some places to continue your education on blockchain technology:

  • – While all the major consultancies have published pieces on blockchain, I found Deloitte’s content to be the richest in depth and scope of topics, especially real estate.
  • – A news site on blockchain and cryptocurrencies.
  • – Harvard Business Review has a number of linked articles on blockchain.
  • – Excellent pieces on impact of blockchain on investment banks and trading.
Matthew Peterson
Matthew Peterson
Matthew E. Peterson, has been in the financial services industry for over 20 years, as both an investment and business leader. He was one of the founders of Fortigent, which was acquired by LPL Financial. He helped develop one of the first applications of Monte Carlo simulations to wealth planning analysis. He has been responsible for creating asset allocation and risk management tools in a variety of contexts, including creating a global commodity equity index to aid in institutional portfolio construction. Most recently, Peterson was the Chief Wealth Strategist at LPL Financial. He earned a dual JD/MBA from the Carnegie Mellon University - Tepper School of Business and the University of Pittsburgh School of Law. View Peterson’s other accomplishments and experience at

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