Goldman Sachs nails why banks are so excited about the technology behind bitcoin
It uses complex cryptography and a wide network of records - known as a "distributed ledger" - to eliminate the need for a central bank or middle man to regulate transactions.
Banks have been swarming around the technology, with 42 investment banks signing up to an industry-wide group looking at how to use it and Goldman Sachs declaring in a note that it has the potential to change "well, everything."
The conversation around this complex technology is pretty baffling, even to many of those involved. Everyone I speak to has a different way of describing it and the possibilities of what it could be used for are myriad.
But Goldman has explained why banks are so excited, in its podcast on "The Digitization of Finance." Don Duet, co-head of the Technology Division at Goldman Sachs, nails it by describing not how blockchain works, but what it can do.
Here what Duet says, as per an emailed transcript:
You can see who had it, who owned it, the fact that they actually committed to each other electronically and signed it with cryptology to ensure that it was authorized. You could see all those things, and importantly, again, by having that all being done in a set of digital transactions, it enables it to happen in a much shorter time frame, so it also reduces a lot of what today are the delays which create other types of risk in the settlement cycles, which need to be compensated for in other forms.
So one of the big benefits is pretty simple - transparency. At the moment, things like share registered are siloed in institutions so if you want to find out who owns what, you have to put a query to that institution.
There are other problems too. Duet says:
In order to facilitate the growth of our industry, much of that has been formed around concepts of having multiple sources or, you know, multiple parties owning a definition of truth, so the Bank of New York will own a big part of the reconciling of the ledger of who owns what stocks in the US, and so would other institutions around the world.
But you end up where... you have this situation where you have multiple versions of the truth, which means that everyone needs to reconcile with each other to ensure that they all have the right set of information - who actually owns that asset, when did it get transferred - and it also creates a certain degree of just temporal delay. It's not possible to be done right away.
With the blockchain, that information is kept across multiple servers - the distributed ledger - all updated simultaneously and all you need to do is check out the blockchain. Much easier.
So the blockchain can reduce admin errors, make things faster, reduces costs, and reduce settlement risk for things like payments and trading. It seems as close as a win-win as you're going to get.
But Duet raises an interesting point in the podcast:
I think that, you know, you could ask the question of, well, why couldn't this have been designed before? And I think that that's a very valid question. I think part of what we find, or I certainly find personally very exciting about this is just the awareness. I think the awareness that's happened within the financial community that there is a technological answer that can help drive change and improve our system is just very encouraging.
Software is eating the world and it looks like it's finally eating finance.
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