Banks drawn to possibilities on the Ethereum blockchain

Bitcoin may grab a lot of a headlines, but since the start of this year, ether — the cryptocurrency of the Ethereum blockchain network — has increased in value by 463%, compared with bitcoin’s 115%, according to CoinDesk. “Financial services groups are driving a lot of the interest in Ethereum,” says Alexandros Seretakis, an assistant professor focused on alternative investment regulation at Trinity College in Dublin. “The interest, however, is in the underlying platform rather than the token [ether].”

As a decentralised open-source blockchain with smart contract functionality, Ethereum holds enormous promise for the financial services industry.

Smart contracts — programs stored on a blockchain that run when predetermined conditions are met — can be used to automate the execution of a transaction so that all participants can be immediately certain of the outcome. “Ethereum’s premise is the utility associated with the transfer of value upon the point at which a set of conditions have been met,” says Haydn Jones, a blockchain and crypto specialist at PwC.

As an open-source platform, developers can build on top of the Ethereum blockchain, creating endless possibilities for applications and opportunities.

“All the top banks are doing exploratory exercises around financial instruments on the Ethereum blockchain in some capacity or another,” says Alex Cravero, the UK head of the digital law group at law firm Herbert Smith Freehills. “[In addition] Ethereum offers so much flexibility around payments, in a way the architecture underpinning bitcoin does not.”

In April, Santander, Société Générale and Goldman Sachs worked with the European Investment Bank to issue a €100m bond on the Ethereum blockchain. “Many more such issuances will follow,” Mr Seretakis says.

In a report entitled ‘Digital assets primer: only the first inning’, issued on October 4, Bank of America talked about the potential for smart-contract platforms to power a vast array of services and applications. “In the near future, you may use blockchain technology to unlock your phone; buy a stock, house or fraction of a Ferrari; receive a dividend; borrow, loan or save money; or even pay for gas or pizza,” the report states.

A global public network

US-based ConsenSys builds open-source infrastructure around the Ethereum blockchain. The company’s founder, Joe Lubin, is a co-creator of Ethereum, and ConsenSys’s products offer points of access to Ethereum for third-party developers. JPMorgan, UBS and Mastercard were among the investors in ConsenSys in a $65m funding round in April.

“Ethereum provides a financial ecosystem that can serve millions of people around the world in terms of payments, banking, savings and investing,” says Lex Sokolin, head economist at ConsenSys. “It could render the financial services industry [in its current form] irrelevant and there is increasing awareness of that.”

In 2020, ConsenSys acquired Quorum, a blockchain developed by JPMorgan, in a bid to bring public and private blockchains together. “Banks have been operating on a number of separate private blockchains, but the acquisition should help enable much greater interoperability,” Mr Cravero says.

“[The Ethereum blockchain] offers banks a global, decentralised, peer-to-peer infrastructure without the challenges of accommodating expensive legacy systems,” he adds.

According to Matteo Bernardis, head of UBS Next, a newly formed division at the Swiss bank engaged with early stage fintech, a public blockchain run on the Ethereum network is full of possibilities. 

He explains the bank’s investment is focused on the long-term future: “The financial services industry is changing and blockchain is one of the founding technologies that is going to lead us there. Over the longer-term, banking will look different and we will interact with our clients in a very different way.”

The speed with which transactions can take place on the network potentially opens the door to new financial instruments that previously lacked liquidity, Mr Cravero adds.

He outlines other potential opportunities. “[The Ethereum blockchain] has the opportunity to accelerate payments across borders, opening up the possibility to access unbanked or underbanked populations. And it offers the ability to achieve this with relative security because the blockchain can record know-your-customer validity information. It can build new ways of creating credit profiles, so it opens up whole new customer bases,” he says.

Continue reading: DeFi: finance’s new era