Bitcoin and its ilk have been shunned by banking executives because they lack the backing of a centralized bank and have been used to conduct illegal transactions, such as buying and selling drugs and weapons online. Yet banks such as UBS, Bank of New York Mellon and the Bank of England have warmed to cryptocurrencies as renowned technology experts have championed the blockchain for its potential to shake up the financial services sector.
Bussmann agrees. Banks have over the last two decades reduced settlement of stocks, bonds and other assets, which involves communications and vetting from multiple parties, from five to two days. That time lag between transaction and settlement time courts financial risk, Bussmann says. For example, someone who has purchased a stock for $100 could see its value fall to $90 by the time the settlement clears a few days later (due to a profit warning or some other negative news that causes traders to turn bearish on the stock), costing the buyer $10 in value depreciation. But financial services firms using a blockchain to facilitate trades could complete transactions in record time, because the technology serves as an unimpeachable authority that doesn’t require vetting between multiple parties. With blockchain, the $100 stock trade would close at $100 and the buyer wouldn’t lose money.