BLOCKCHAIN-BASED SOLUTIONS The main promise of blockchain based on private blockchain imple- technology in capital markets lies in mentations are the only acceptable the full automation of trade process- alternatives to bitcoin-like public ing across asset classes. The greatest chains for financial institutions. expected impact is on products such as syndicated loans, foreign exchange Of all the tech clusters, blockchain- for currencies not covered by continu- based fintechs have experienced by ous linked settlement, and over-the- far the highest compound annual counter derivatives, whose back-office growth rate over the past three years. processes remain largely manual. Yet disclosed funding for such projects is still significantly behind Blockchain-based solutions are other areas of innovation, such as currently being developed through data and analytics (a ratio of 1:4). two approaches: industry collabora- Cross-industry settlement of billions tions that involve multiple players, of daily trades among globally such as the Hyperledger Project, and dispersed counterparties, although efforts led by individual players (SETL, theoretically feasible by using block- NASDAQ OMX Group with Chain, chains, represents one of the toughest UBS with Clearmatics Technologies, use cases for a technology still in its and the Depository Trust & Clearing infancy. Automation of more simple Corporation). However, although processes, such as recording client prototypes exist, there is still minimal data on decentralized ledgers for KYC traction within the industry because and for anti-money-laundering of the relative immaturity of the purposes, is likely to emerge first. technology and the fact that solutions $2.2 billion and $1.1 billion, respectively), at a combined ratio of about 6:1 relative to post-trade activities. (See Exhibit 4.) Moreover, post-trade and support remain the least mature segments of the value chain, with early rounds up to series B represent- ing 82% and 64%, respectively, of the total funding they have received since 2000. For investment banks, this dynamic partly reflects an effort to revive the age of rev- enue growth, notably by increasing the share of client wallet. Although there are areas in which banks could create new products and increase trading volumes, the pursuit of market share in a stagnant environment is a zero-sum game for the in- dustry as a whole, because competitors can improve their relative positions only by capitalizing on market share dislocations. Also in play are reactive strategies to maintain positioning in a market with increas- ing electronification. With front-office compensation representing roughly 40% of to- tal costs, banks recognize the benefits of moving toward more cost-efficient service models with lower front-office headcounts. Most important, banks may be finding it easier to apply front-office technology, which can be deployed one bank at a time, rather than back-office initiatives, which could require significant industry collabora- tion to fully realize any benefits. Moreover, although explicit post-trade costs repre- 8 Fintech in Capital Markets