Exchanging Value: Daily, markets globally facilitate the exchange of trillions of dollars of financial assets. Trading is the buying and selling of assets and financial instruments for the purpose of investing, speculating, hedging, and arbitraging and includes the posttrade life cycle of clearing, settling, and storing value. Blockchain cuts settlement times on all transactions from days and weeks to minutes and seconds. This speed and efficiency creates opportunities for unbanked and underbanked people to participate in wealth creation.
Funding and Investing: Investing in an asset, company, or new enterprise gives an individual the opportunity to earn a return, in the form of capital appreciation, dividends, interest, rents, or some combination. The industry makes markets: matching investors with entrepreneurs and business owners at every stage of growth — from angels to IPOs and beyond. Raising money normally requires intermediaries — investment bankers, venture capitalists, and lawyers to name a few. The blockchain automates many of these functions, enables new models for peer-to-peer financing, and could also make recording dividends and paying coupons more efficient, transparent, and secure.
Moving Value — make a payment, transfer money, and purchase goods and services. Transfer of value in very large and very small increments without intermediary will dramatically reduce cost and speed of payments Retail banking, wholesale banking, payment card networks, money transfer services, telecommunications, regulators. Daily, the financial system moves money around the world, making sure that no dollar is spent twice: from the ninety-nine-cent purchase of a song on iTunes to the transfer of billions of dollars to settle an intracompany fund transfer, purchase an asset, or acquire a company. Blockchain can become the common standard for the movement of anything of value — currencies, stocks, bonds, and titles — in batches big and small, to distances near and far, and to counterparties known and unknown. Thus, blockchain can do for the movement of value what the standard shipping container did for the movement of goods: dramatically lower cost, improve speed, reduce friction, and boost economic growth and prosperity.
Lending Value: From household mortgages to T-bills, financial institutions facilitate the issuance of credit such as credit card debt, mortgages, corporate bonds, municipal bonds, government bonds, and asset-backed securities. The lending business has spawned a number of ancillary industries that perform credit checks, credit scores, and credit ratings. For the individual, it’s a credit score. For an institution, it’s a credit rating — from investment grade to junk. On the blockchain, anyone will be able to issue, trade, and settle traditional debt instruments directly, thereby reducing friction and risk by increasing speed and transparency. Consumers will be able to access loans from peers. This is particularly significant for the world’s unbanked and for entrepreneurs everywhere.
Insuring Value and Managing Risk: Risk management, of which insurance is a subset, is intended to protect individuals and companies from uncertain loss or catastrophe. More broadly, risk management in financial markets has spawned myriad derivative products and other financial instruments meant to hedge against unpredictable or uncontrollable events. At last count the notional value of all outstanding over-the-counter derivatives is $600 trillion. Blockchain supports decentralized models for insurance, making the use of derivatives for risk management far more transparent. Using reputational systems based on a person’s social and economic capital, their actions, and other reputational attributes, insurers will have a much clearer picture of the actuarial risk and can make more informed decisions.
Accounting for Value: Accounting is the measurement, processing, and communication of financial information about economic entities. It is a multibillion-dollar industry controlled by four massive audit firms — Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young, and KPMG. Traditional accounting practices will not survive the velocity and complexity of modern finance. New accounting methods using blockchain’s distributed ledger will make audit and financial reporting transparent and occur in real time. It will also dramatically improve the capacity for regulators and other stakeholders to scrutinize financial actions within a corporation.