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The Potential of Blockchain in Investment and Finance

Blog

Expert analysis from Joanne McEnteggart, Managing Director, IQ-EQ Ireland.

When people hear the word ‘blockchain’, I think if they were being honest most would admit it’s something of a mystery to them. However, its value and importance in how we run our finance and operations functions going forward cannot be over-emphasised. As business leaders, we must all get our heads around it to realise its true potential.

How does blockchain work? In the main it’s focused on transaction processing. It allows companies to record their transactions directly into a joint register with a number of permitted parties, and this in turn creates a highly secure, interlocking system of verifiable and enduring accounting records. Crucially, in such a system there is complete integrity of accounting records and fully traceable audit trails, with no ability to vary the data. As we all know, integrity of data is sacrosanct, so blockchain technology is incredibly valuable for its ability to remove the risk of human error and fraud.

Utilising blockchain also saves time. With the requirement for frequent reconciliation of data removed, man hours can instead be deployed to better serve clients. Blockchain provides full end-to-end transparency across operations and finance allowing better optimisation of working capital. For asset managers, blockchain technology also offers great potential in regard to AML/KYC for investors and custody recording of assets.

Across the IQ-EQ group, we have a number of clients operating in the blockchain space. One client of our Dutch office – an open-source cryptocurrency and payment network – provides an excellent example of blockchain’s ability to create international marketplaces. You can have two parties located on opposite sides of the world (or sitting next to one another, who knows?) transacting in a single currency, paying almost nothing in transaction costs, benefiting from immediate clearing and settlement, with zero foreign exchange risk. One recent transatlantic transaction for US$62 million on the Litecoin network was settled for just 50 cents.

This is not only significant for large corporates with multi-million-dollar transactions, but creates immense opportunity for communities where a traditional banking infrastructure is lacking but where digital communications infrastructure is present (think rural Africa, or the thousands of islands in Southeast Asia). Through blockchain, small vendors and consumers can transact internationally for very limited costs.

In Deloitte’s 2018 Global Blockchain Survey, 74% of the 1,053 executives who responded reported that their organisations see a “compelling business case” for using blockchain. Within sizeable firms, blockchain could be used purely for internal needs across our own companies – particularly where services routinely span multiple company entities and countries, involving reconciliation and transfer pricing considerations. Utilising blockchain would reduce the time taken to facilitate settlement and process payment. It also allows us to test a blockchain solution before determining whether it makes sense to design it for use with external parties.

What should we be therefore doing to leverage blockchain’s potential in investment and finance? We need to do our homework, keep an eye on what our competitors and other companies are doing and what their experiences have been. Discuss it with our suppliers and trading partners and gather their thoughts on how blockchain may improve our total platform. Engage with blockchain experts to establish where it may add value and outline a strategy. Assign staff to assess this area for us and keep up with the latest developments. Ensure our compliance and risk teams are on board and comfortable that blockchain is a reliable way to document and manage risk and compliance. And, as with any new strategy, create, implement and continually optimise a clear plan. 

Blockchain uses encryption of blocks of computer code, so unless we’re truly tech-savvy it’s not something we can easily comprehend. Identify a part of the process that you can test and this will allow you and your business to better understand it.

Joanne McEnteggart is Managing Director at IQ-EQ Ireland.