This is part II of a two part series. Click here to read the first part.

Blockchain has many benefits that will impact a lot of industries. For the financial service industry, the key potential benefit is the ability to impact post trade settlement. On the other hand, there are multiple technical, business, and regulatory challenges that the industry still needs to overcome. By understanding these benefits and challenges, an investment professional can better identify potentially profitable investments in the blockchain space, and better implement blockchain technology into their business operations.

Post Trade Settlement

One of the most important potential benefits of Blockchain technology is the possibility of reducing the post trade settlement period. Settlement periods are the time between the execution of a trade, and the performance of all duties necessary to satisfy all parties obligations. With current technology this often takes several days. Title to most financial assets can only be settled against payment when banks are open for business. That is a relatively limited time window in a globalized world. One way to solve this would be to have one blockchain accounting for ownership of money, and another that accounts for ownership of securities. Assuming the buyer has sufficient funds and the seller has sufficient shares(or other securities), then settlement could occur any time of day in a matter of seconds with full certainty and legal certainty.

Faster payments

Closely related to faster post trade settlement is faster payments. A digital ledger system with digital identities for all parties involved can make foreign exchange transactions process faster, for example.

Blockchain is far from perfect however. There are several technical and business challenges posed by blockchain technology. Here are a few challenges outlined in the article:

Achieving consensus. Blockchain requires consensus among a blockchain’s network’s members. Since the ledger is distributed among all participants in the blockchain, any change in the protocol must be approved by all. A potential solution would be to give one or a few participants authority to make changes binding on the entire network. However blockchains purists would point out that this is not really a trustless solution. There is a tradeoff between the amount of consensus needed and the speed at which things can be completed.

Technical and Business Challenges

Standardization. There are many different blockchain designs. This can cause major issues in implementation by businesses. There are many different international and regional organizations working to establish technical standards. IRonically, the proliferation of standard setters might slow down the process of standardization.

Interoperability . Closely related to the issue of standardization is the issue of interoperability. There are so many different blockchain network systems that it can be hard to get them to operate together.

Scalability is another important issue. IT can be hard to make a truly permissionless system scale up. The race takes a large amount of computing power, which slows down the processing of transactions. In any cases these networks require a lot of computing power.

Efficiency. There is a tradeoff between efficiency and being truly trustless. A complex computational system to confirm transactions is less efficient than a system relying on the discretion of permissioning nodes, but offers advantages in that not everyone needs to agree to trust certain parties.

Immutability. Once a transaction is added to the blockchain it can’t be reversed. Fat finger trades can be fatal in this case. What if a regulator requires a transaction to be reversed? It’s not possible on the blockchain. In practice, erroneous transactions can be reversed in financial markets. If you move to blockchain you need to do without this capability.