BITCOIN, BLOCKCHAIN AND INVESTMENT BANKING

Cryptocurrencies have excited the risk takers and day-dreamers around the world, but the investment bankers might turn the elusive money into something tangible.** 

By Atique Naqvi, aka Syed Atique Hussain, Boston, United States

Cryptocurrencies such as Bitcoin have become financial celebrities.

With the exponential rise of Bitcoin, about 750% since the first quarter of 2017, there has been a renewed interest in cryptocurrencies or the blockchain system. Though small and retail investors have been the driving force behind the rise of cryptocurrencies, investment bankers and asset managers are also watching closely at the ‘new money’ as a credible and a legit asset class.

The interest from big investment bankers has probably prompted Chicago Mercantile Exchange and Chicago Board Options Exchange to launch Bitcoin Futures. 

The investment banking has witnessed a good year in 2017, and before delving into the cryptocurrency aspect, let’s examine the state of the sector.

Two of the major components of investment banking are IPOs and M&As, and owing to the stabilizing Eurozone markets, sustained growth in emerging economies, and positive sentiment in developed markets such as Japan, Canada, and Australia have propelled the financial services industry.  

In 2017, Canada, Latin America, and Europe have emerged as a winner on the investment banking front riding on a significant increase in the mergers and acquisitions deals. Overall the global M&A activity in 2017 was down five percent to US$3.2 trillion, a major component of investment banking.

On the IPO front, global firm EY has said that IPO activity for 2017 was the busiest year since 2007 with 1,600 to 1,700 IPOs raising US$190b to US$200b. “This is due to rallying markets, low volatility, strengthening investor sentiment and a healthy pipeline, absent any concerns emanating from the Korean Peninsula,” it says.

Besides the popular Bitcoin, there are several measures taken by the government and established financial players around the world to incorporate blockchain system.

Global consulting firm Accenture in the latest report says 2018 will be the “year of growth for blockchain”, and the digital system may bring down operational costs of investment banking by 30 percent.

The Monetary Authority of Singapore has sanctioned a study on cryptocurrencies, and the business-friendly country is all set to launch a digital version of its Singapore dollar (one Singapore dollar would get you US$0.736).

Accenture joined hands with the Monetary Authority of Singapore (MAS) and The Association of Banks in Singapore (ABS) to publish a report that illustrates how blockchain technology could significantly improve the kinds of payment systems that currently enable banks around the world to transfer trillions of dollars per day to each other and help them manage their financial liquidity.

The report is based on the results of a successful prototype involving nearly a dozen major banks and three leading blockchain technology platforms that were tested in parallel. The test confirmed that real-time gross settlement (RTGS) functionalities such as gridlock resolution and a liquidity-saving mechanism on a decentralized system work. Real-time gross settlements are large-value interbank payments of cash or securities that require immediate settlement. Crucially, the test proved, perhaps for the first time, that blockchain-based designs can also effectively preserve privacy in such transactions.

INTERBANK PAYMENT RISKS

According to the report, a blockchain-based system could also help mitigate interbank payment risks by increasing system resiliency through the removal of a single point of failure and providing cryptographic security, immutability, and real-time processing.

The joint study is based on the outcomes of Phase 2 of Project Ubin, which was managed and delivered by Accenture. The 13-week project was led by MAS and ABS, with participation from 11 financial institutions. It explored the use of blockchain technology for specific RTGS functions, including the feasibility of decentralizing liquidity saving mechanisms, while maintaining privacy in banking transactions.

Accenture leveraged the blockchain capabilities of the Accenture Liquid Studio in Singapore to develop three prototypes by three workstreams on three different blockchain platforms: Corda, Hyperledger Fabric, and Quorum. The prototypes successfully demonstrate that key RTGS functions, such as fund transfer, queueing mechanisms and gridlock resolution can be achieved through a variety of techniques and solution designs.

The report indicates that a blockchain-based RTGS system would reduce the costs and resources of day-to-day operations and eliminate the risk of the central bank becoming a single-point-of-failure in a systemic disturbance.

Coming back to Investment banking, NASDAQ launched Linq, a blockchain solution for the

issuance, ownership tracking and trading of private equity assets. The Australian Securities Exchange is working to evaluate the possibility of using blockchain technology to replace its current clearing and settlement system.

The Depository Trust and Clearing Corporation, having successfully tested blockchain technology on trading swaps with four banks earlier in 2017, is now focused on other asset classes.

The global M&A activity has been on the upswing in 2017.

Accenture in its latest recent research says that at the heart of the long-term opportunity is the ability for banks to repoint key operational, risk, and finance systems to distributed ledger technology based shared data platforms and decommission large portions of their process and data infrastructure. It will take time and multiple iterations of the platforms to get to that end-state. The potential for material cost and efficiency gains are what is driving the industry's focus and investment.

A joint research by Accenture and McLagan, a business unit of Aon plc, estimates that the average operational cost-saving potential of full-scale blockchain adoption across eight of the largest global investment banks could be in the range of up to 30 percent or more per institution.

This estimate does not yet include the savings that could result from lower transaction fees paid to exchanges and clearing houses. It also does not include the potential savings associated with lower capital requirements. As settlement times are shortened, security deliveries and payments are optimized, and settlement finality risks are reduced, capital that is currently “trapped” on the balance sheet will be unlocked, says a report from Accenture.

It adds: “But to be clear—blockchain is not a panacea. It will improve some processes, but not all. Banks need to examine their existing operational systems to determine where blockchain can add value, in the long run, taking into account the likelihood/concrete examples of adoption by the broader ecosystem, and the demands and role of regulators in the process.

Moving forward, one of the challenges is the unclear regulations. Accenture report says: “while there is uncertainty around the regulatory response to the blockchain, one thing is certain: Regulators are more likely to respond to banks and industry blockchain initiatives than to provide best practice guidance, at least in the near term.

“Banks should ensure that their blockchain-enabled solutions comply with all current regulatory mandates, even if certain rules seem unnecessary or redundant. That means taking account of all current regulatory mandates supported via existing front-to-back office processes and they will continue to stand up to regulatory scrutiny.”

GLOBAL M&A ACTIVITY

The M&A activity was highest in the Middle East and Africa region in 2016 up 102% as against 2015, while in 2017 it was down six percent to US$74.5 billion. Latin America, Europe, and Canada were the major gainers in 2017.

The M&As in LatAm was up 23 percent to US$88.1 billion, in Europe 17 percent to US$834.4 billion and in Canada, the activity was up 14 percent to US$94.2 billion.

Australasia was the biggest loser with M&A activity decreasing 31 percent in 2017 as against 2016, the US and Japan were down 17 percent each, while Asian M&A activity decreased by two percent in 2017. 

HIGHLIGHTS OF IPO IN 9M 2017

Global consulting firm EY had put together a report on the global IPO activity.

Main takeaways are:

1. The first nine months of 2017 saw a healthy increase of 59% by number of IPOs and 55% by

proceeds compared with the first nine months of 2016.

2. Megadeals were back with a bang this quarter and from all parts of the globe. Q3 2017 saw 10 US$1b+ deals pushing stock exchanges in Brazil, Singapore, Switzerland, and India into the list of the world’s top 10 by capital raised, behind Shanghai and Hong Kong.

3. Asia-Pacific continues to dominate IPO activity both by the number of deals and proceeds, accounting for 60% of IPOs and 42% of capital raised worldwide so far in 2017.

4. Both EMEIA and the Americas exchanges have been more active in the first nine months of 2017 compared with 2016. In EMEIA, the number of IPOs has increased by 38% and proceeds by 47% compared to the first nine months of 2016, while the deal number in the Americas is 57% higher and capital raised rose by a significant 151%.

5. US IPO activity in 2017 appears as a spike because 2016 was an unusually slow year, due to uncertainties surrounding the US election and interest rate hikes, and narrower transaction windows.

6. Industrials have been the most active sector in Q3 2017 with 70 IPOs, followed by technology with 52 IPOs and consumer products with 39 IPOs. Technology leads to proceeds with US$5.9b raised.

7. The proportion of cross-border deals has increased each quarter in 2017 by deal number and capital raised, surpassing full-year 2016 levels.

** This article first appeared in Unisol magazine (Essel Group Middle East) published by Mediaquest Corp, Dubai, UAE.