The debate surrounding the use of blockchain in the financial services industry shows no sign of abating. New proof-of-concepts are launched daily, with leading firms in the marketplace working on real-life applications of this technology. More transparency, significantly increased transaction speeds, less manual overheads and improved efficiency are just some of the benefits. But while these characteristics are certainly beneficial, it is important to recognise that they are not exclusively owed to distributed ledger technology (DLT).  

It is evident that the main reason blockchains in capital markets provide any benefit at all is the simple fact that firms are leveraging just one single solution to replace multiple systems. Achieving improved efficiency and transparency is a relatively straightforward process when utilising a single consolidated system.

This process becomes significantly more challenging when you have a complex net of hundreds of interconnected systems, each with their own processing schedules, standards, protocol formats and routines. Blockchains are often seen as the silver bullet able to untangle this maze. An often overlooked fact however is that almost all challenges which the industry is currently trying to resolve by employing blockchains could be equally addressed by transitioning to any other mutual solution.

For example the burden of reconciliation of financial records between multiple siloed disjointed systems could be resolved by allocating identities to each party through a mutual public key infrastructure (PKI) and implementing a messaging protocol enabling firms to sign contracts and transfer assets.

This is not a new concept. In the early 1970s, 239 banks from 15 countries formed a cooperative utility, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to solve a common messaging standardisation problem for the banking industry. The initiative was so successful that today SWIFT is a key market infrastructure underpinning global financial markets.

SWIFT is what is known as a "cooperative society" under Belgian law and is owned by its members. It shows that financial institutions can legally share ownership over a mutual financial messaging network – without blockchains.

Nevertheless, while efforts to implement DLT are, conceptually at least, the same as employing a mutual ownership network of 40 years ago, they are somewhat more ambitious. While mutual ownership of infrastructure at the legal level has previously been possible, blockchains might be able to innovate mutual ownership of systems at the operational level.

Theoretically blockchains could decrease fraud, corruption and manipulation in capital markets. However decentralisation of control of the ledger at the operational level is crucial if these benefits are to be realised.

Personally I have not seen any examples of this true decentralisation actually happening in capital markets thus far.  All current incarnations of blockchains are private/not decentralised and even centrally controlled at the operational level, resulting in more of the same in terms of existing systems and standards.

If truly public and decentralised blockchains where factors like fraud, corruption and manipulation are mitigated ever get implemented, then even more market participants would be compelled to mutualise their infrastructure by using such systems in a collaborative way – such platforms would be considered neutral and therefore less conflictual in terms of sharing. Naturally, the more participants that use a common system the more useful the system becomes. By the same token, if blockchains can play a wider role in mutualising financial infrastructure then they can bring real efficiency improvements if compared to the current financial infrastructure.

In my opinion, the current improvements publicly attributed to DLT have been generally achieved not because of the technical properties specific to DLT, but because the blockchain hype has driven firms to work together. So while DLT certainly presents compelling prospects in terms of the evolution of global capital markets, developments to date have largely resulted from the power of industry collaboration, rather than the innovative potential of blockchain technology itself.