Global financial services firms are looking at ways to adopt the technology behind Bitcoin for use in institutional finance, according to a new Greenwich Report, Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets, from Greenwich Associates.

The technology that allows Bitcoin to exist and to be transferred safely without an intermediary is called the blockchain. Also known as digital or distributed ledgers, these networks record transaction information, just like their paper ancestors, and ensure that a digital asset cannot be spent twice or used by someone who doesn’t own that asset—all without any central oversight of either the currency or the ledger.

Between May and June of 2015, Greenwich Associates interviewed 102 institutional financial professionals to determine the level of awareness and understanding of distributed digital ledger technologies among financial services firms.  While actual adoption in the capital markets is still limited, 94% of the financial professionals interviewed in the study believe distributed ledger technology could be applied in institutional markets, with nearly half actively reviewing the technology within their firms.

Distributed Ledger as Risk Reduction Tool
While the motivations for adoption are varied, there are a few major themes common across the study participants.  Settlement, counterparty and custodial risk reduction were all key drivers.  From a product perspective, OTC derivatives, private stock, repo, and loan markets were viewed as the most likely asset categories to benefit from distributed ledger technology in the medium term.

“Given the growth in trading volume but still limited infrastructure, the markets for leveraged/syndicated loans and private stock are strong candidates for early adoption of distributed ledger technology,” says Kevin McPartland, Head of Greenwich Associates Market Structure and Technology Research and co-author of the report.

“In both par loans and CLOs, a monthlong settlement cycle is common and often includes the use of a fax machine,” says Dan Connell, Head of Greenwich Associates Market Structure and Technology Practice and co-author of the report.  “For a market so obviously in need of technology, it makes sense to implement improvements with the latest tools and approaches available, like blockchain.”

More Research to Come
A number of hotly debated questions remain unanswered regarding capital markets’ adoption of distributed ledger technology. Can Bitcoin and the blockchain be separated effectively? Can private blockchains operate without losing the benefit of the public blockchain? Can other technology solve the same problems just as effectively? Greenwich Associates will examine these and other questions about distributed ledger technology in a forthcoming report.