Has the arrival of blockchain technology tapped the potential for new game changers in the traditional investment market? Thomas Schneider, CIO at BrickVest discusses some of the advantages that blockchain technology is bringing to the financial market.
The current traditional investment market is controlled by a small, elite group composed of very large banks, insurance companies and private equity firms.
These firms act as gatekeepers and determine who is included in the close-knit group and conditions for investors to access real estate listings in the retail, professional or institutional markets.
The lack of transparency, high complexity and low competition in the traditional investment environment are particularly attractive to financial gatekeepers as they can exploit them to their advantage.
However, this imbalance is set to come to an end (or at least get vigorously shaken up) in the near future. With the arrival of digitisation comes new forms of transactions within the old, dusty finance and investment markets.
Cryptocurrencies and blockchain technology can improve the inefficient structures of the financial markets. These technologies diminish the privileged position of the gatekeepers and ensure greater transparency, efficiency and higher returns in the financial and real estate investments alike.
With this in mind, let’s consider how blockchain can make a difference.
In the last two years, there has been a lot of media hype around bitcoin and blockchain technology.
The digital currency (bitcoin) and its decentralised payment system (blockchain) are capable of turning the entire financial system upside down as transactions can now be directly exchanged in a transparent and secure way between two parties.
The main advantages of blockchain technology is that transactions have the potential to be significantly cheaper, faster and more transparent.
However, blockchain tech is not only advantageous when it comes to monetary transactions for shares, contracts and ownership. It also makes all transaction processes more transparent and displays information about individual events in real-time. So all relevant actions and contracts in the blockchain are counterfeit-proof documents. Effectively, the creation of an online register makes the complex, expensive work of notaries and trustees obsolete.
In addition, blockchain is considered safe because transactions can be automatically disabled in the event of any discrepancy, for example, double sale of shares.
Decentralised ledgers are able to keep secure transaction records between two parties, completely independent of any authorities, and thus enforces accountability and transparency making tampering with this record difficult.
There is no one entity, like a bank, which controls blockchain meaning that participants can verify the transactions and they are not forced to rely on one entity to keep track of balances.
The technology has put an irrevocable change in motion: The traditional way in which transactions are executed, could potentially be replaced in the near future due to the service offering which blockchain technology has of transparency, lower costs and better security.
The end of the middleman era?
With these advantages in mind, what will become of the previously dominant few, but very large market players of the investment market?
The fact is that the conventional offline processes suffer from tediousness and the costs incurred by notaries and trustees. These now stand to be made obsolete with the arrival of blockchain technology: a certification of a transaction or a contract, the manual, physical delivery of contracts and other documents is no longer necessary.
Nevertheless, the era of middleman has not completely ended. Banks and other institutions who recognise the advantages of this new technology can profit enormously. By using blockchain technology they are able to work faster and more economically.
This brings an enormous competitive advantage. Some traditional financial institutions such as Bank of America have already recognised that blockchain’s inherent potential and thus have invested in the technology.
The middlemen who have not paid attention to this new development and do not recognise the benefits it has to offer, I believe, are fighting a losing battle.
Blockchain and investment
Blockchain technology has already been described as a game changer in light of recent developments, having changed the existing rules of the traditional investment market.
As a decentralised database, blockchain technology has already made the online investment market more fluid whilst acting as an interesting tool for the secondary market, enabling smaller investments and trade volumes.
These smaller investments were not possible before due to the cost of the middle man. For example a £5,000 investment did not make sense if the notary and the trustee would take a cut amounting to £2,000.
In my opinion, blockchain technology makes much more sense for secondary markets such as real estate investments and equity crowdfunding. This is especially because previously these investments would not be viable due to the high transaction costs.
Aside from the economic aspect, blockchain technology also makes the entire transaction process much more investor-friendly because all processes run automatically and you no longer have to deal with middlemen who wastes the investor’s time and money.
This is especially the case for transnational investments where the investor is looking to avoid all type of unnecessary involvement of third parties.