A friend of mine at JPM received an internal email the other day. It was broadcast to all staff and, as it’s all about blockchain, thought I would share with y’all. It goes like this …
Innovative blockchain technology may provide links to improve client experience (Feb. 09, 2016)
J.P. Morgan is pursuing a three-pronged approach to determine if blockchain technology holds the key to reducing settlement times, enhancing efficiency and increasing transparency BY MICHAEL DORFSMAN
“Blockchain technology makes all the sense in the world. It’s easier and faster operationally, and gives you fewer mistakes.” DANIEL PINTO
As technology promises to transform the banking industry, J.P. Morgan is positioning itself to take advantage of blockchain technology by being in the forefront of efforts to test its capabilities to better serve the client experience.
While the blockchain technology has been frequently linked to transactions in bitcoins, J.P. Morgan and other financial institutions see blockchain technology in a larger context, unrelated to virtual currencies. J.P. Morgan, still in the early testing phase of what is also known as distributed ledger technology, is working closely with clients and other industry participants to assure widespread understanding of the technology’s capabilities.
When set up as a private network of known counterparties, the underlying technology can facilitate and expedite a range of banking and trading transactions, be it in syndicated loans, credit default swaps or foreign currency trades, to cite a few examples.
Essentially, blockchain technology enables each of the counterparties to have the same copy of the transactions on their ledgers, which are automatically synchronized. Each of the parties to the transaction is included in a private database network which is maintained in “blocks” of records. By being constantly updated and visible to all parties, the shared ledger avoids the need to send transaction data to an outside clearinghouse, which, in turn, verifies the information and reports it to all the parties.
As Daniel Pinto, the CIB’s CEO recently told the Financial Times, the blockchain technology would make it possible to speed up the settlement process, using syndicated loans as an example. “To sell a loan is a very cumbersome, time consuming process; settlement can take weeks,” he said. But the blockchain technology “makes all the sense in the world; it’s easier and faster operationally, and you get fewer mistakes.”
If borne out, the technology’s ability to speed up the settlement process would lead to an improved client experience and lower risk. Because the information is instantaneously and accurately shared among all counterparties in the network, transparency is improved, the individual counterparties are freed from having to update their own books, and regulators are able to review the trade details with confidence.
Underscoring Pinto’s comment about syndicated lending, Amber Baldet, who leads the Blockchain Technology Center of Excellence (COE) for the New Product Development Group, said syndicated loans provide a good test of the blockchain technology because the transactions involve a number of counterparties who need to exchange faxes and make calls to verify the details, a process that can take weeks to validate the details.
“But with distributed ledgers, we can get to the point where the technology can facilitate faster settlement and meaningfully identify where the loan is in the settlement lifecycle process,” Baldet said. “For that matter, the client and the institution could decide on exactly the date they want to settle. That’s what we mean by improving the client experience.”
With a blockchain, all the parties in the transaction are part of a private network with shared access to the same ledger. “Everyone in the network sees the same record, and because of the math and cryptography behind it, the numbers are trusted,” David Voell, engineer for CIB Technology New Product Development, added.
With shared access, the parties can prove mathematically that the information is correct and transactions can only be added. If there’s an error, the transaction can only be negated in a process that requires all parties to the transaction to sign-off.
“The technology introduces a massive efficiency in terms of eliminating a lot of the manual processes, which translates into a better and more efficient client experience,” Baldet said. “It can have implications across our all our businesses, markets, investors services and banking.”
J.P. Morgan’s Blockchain Technology Center of Excellence is taking a three-pronged approach, building in-house capabilities, forging external partnerships and joining with financial institutions, technology companies and others to form consortiums.
For the in-house approach, J.P. Morgan has created a team of engineers to vet the blockchain technology in marketplace tests. In addition, J.P. Morgan has recently invested in Digital Asset Holdings (DAH), a start-up run by Blythe Masters, a former CIB Management Committee member who held several top positions at the firm, the last being head of Global Commodities.
J.P. Morgan is among a group of banks that has invested in DAH, which recently announced it had raised more than $50 million.