Vivek Talati

Nov 11, 2020

3 min read

Investment Banking and Blockchain

Blockchain is one technology’s newest and biggest buzz words. We have seen companies that simply mention the use of blockchain and their stock will jump significantly in one day. But exactly what is blockchain and where does it come into play with investment banking?

Blockchain is a technology that eliminates the need for a centralized power to be controlling transactions. Transactions/data are put into a digital ledger, where it is then verified by multiple “miners”, more on that here. Once the transaction is verified, the transaction occurs. The history is permanent and cannot be changed, adding a level of transparency that is currently not present by governments and banks. Blockchain will also be a way of storing data, which will be its main purpose for use in investment banking. The blockchain is extremely difficult to hack making fraud a much less likely possibility while also ensuring safety for users.

In investment banking, blockchain can significantly cut costs for tedious jobs involving lots of paperwork through a shared network. For example, the blockchain could store people’s financial information to know what their investment goals are, as well as financial documents. The documents would encrypted using blockchain cryptography and the consumers would choose who to give access to these documents. The investment banks would already know if they want to take on these clients based on the documents that are released to them.

Another application would be speeding up the process for the “Know Your Customer” (KYC) checks that investment banks are required to conduct. Rather than each financial institution needing to conduct their own checks on possible clients, a blockchain would exist, holding previous KYC checks completed by other institutions. The customer would grant the new institution access to the KYC, making this whole process much more efficient. This would safely hold clients’ data while speeding up many processes.

The blockchain can also be used to scan for money laundering and prevent possible money launderers from using investment banks as a medium of money laundering. Using the same chain of blocks and ledgers, the database would look for any person or group that has been known to conduct suspicious activity and alert investment banks to these issues.

The cost cutting according to Goldman Sachs would be enormous. The prevention of money laundering and speeding up of KYC checks would save an estimated $6 billion (yes billion!) in costs per year.

Blockchain is clearly the future of investment banking and these reasons are just a few of many. But, more notably, I believe that blockchain will provide a sense of transparency to investment banking that has not existed for quite some time benefiting us all.