The Opportunities Blockchain Can Offer Investors

Paul Brody, head of Blockchain at EY, explains how blockchain technology is reshaping the financial services industry and opportunities it can offer companies in general. Brody also discusses ways investors can take advantage of blockchain and shares what it will take for it to gain more mainstream acceptance.

What is the current state of the blockchain industry and technology?  

We’re coming to the end of a period of immense innovation and risk-taking, and the market is starting to consolidate around primary platforms and core technologies. I see Ethereum (ETH) as the key winner here, having survived multiple rounds of intense ups and downs, and it remains the biggest network with the most innovation.

This doesn’t mean an end to innovation, but the focus moving ahead will shift away from platform questions and back towards use cases. We’ll also see more maturity and care taken in developing and testing solutions. Customers, some having been burned by two crypto winters, will be more careful in testing out new solutions.

What are some of the major trends influencing the space? 

A growing focus on regulatory compliance is one of the top-of-mind issues for everyone. It’s largely good news – the more that regulators set clear rules, the more comfortable investors will become in bringing their money into the ecosystem.

Another area of rapid growth is going to be supply chain and ESG applications for public blockchains. The ability to track supply chain operations, assets and even emissions in great detail for each product is a big step forward. ESG traceability is now the fastest growing part of our blockchain business at EY.

How is the blockchain technology reshaping the financial services industry? 

Blockchains are having an impact similar to app stores on individual bank relationships. They allow each customer to assemble a set of different financial services from a variety of providers that will unbundle a lot of financial services and create big new competitive online markets. 

The pace of change here will slow temporarily as buyers digest a huge wave of bankruptcies and new regulatory rules, but the overall trajectory remains the same: many previously integrated financial services will now be unbundled and individually accessible to customers through a public blockchain.

What are some of the opportunities blockchain can offer companies? 

Enterprises should look at both growth opportunities and cost cutting opportunities.  We believe public blockchains will reshape how companies transact with each other, allowing firms to have smart, automated digital contracts that automatically enforce major terms and conditions. So far, in our case examples, such as with Microsoft, we’ve found we can cut the cost of administering contracts by 40% and the time required to manage them by >90%.  That produces a big return on investment. 

Blockchains are likely to really change how companies and people finance and manage their assets. Today, financial services tied to assets or products, or contracts can be complicated and expensive because each contract has to be understood on its own, and nearly all of these are on paper. A world of digital contracts means a world of automatic reviews and product offers. The world of finance, in particular, could become simpler and more automated and much lower cost.

How can investors take advantage of the blockchain space and its advancements?  

Like any new business ecosystem, it’s remarkably difficult to pick winning companies. Blockchains are no different. I believe, for example, that Decentralized Financial services (DeFi) are going to be transformational, but I’m not comfortable saying which companies will succeed.  The rise of on-chain smart-contract-defined blockchain index funds is a good way to take part in an overall sector.

Another way to participate in the lowest risk part of the ecosystem is through staking. This involves buying a stake in a network like Ethereum, and then agreeing to put up your network capital as a bond to support network liquidity and security. This is usually done through a service provider, though you can also do it on your own, and also entitles users to a share of the network transaction fees. This is looking like it may become the lowest-risk way to invest in an ecosystem.

What will it take for the blockchain technology to gain more mainstream acceptance?  

A key capability that’s maturing now is privacy. Enterprises in particular are looking for privacy enabled solutions before they commit to managing sensitive supply chain networks on-chain.  EY’s work on Nightfall, a privacy system for blockchain operations, has been the key to unlocking a number of supply chain engagements with our clients. I expect to more growth as this solution gets better known in the industry.

The other key gating factor is improving security and usability. There are good security tools out there and sophisticated users know how to take advantage. For less technical users, it is still rather risky and complicated. We know from the world of mobile that good user experiences can be architected with privacy in mind, it just takes focus.  

What are some of the major news headlines you are following?

One of the most predictable, but unfortunate, consequences of the deep crypto price declines has been the wave of defaults that have cascaded across the ecosystem. Many people wanted to think that DeFi ecosystems had better risk management from transparency and on-chain data. That turned out not to be the case. We’re now seeing a big change in how people develop product and evaluate risk in the network. Watching how these crises play out and how they compare to historical bank runs and financial crises is incredibly interesting but more than a little distressing when you find out how many people bet money they couldn’t afford.

Whenever I’ve argued in favor of a more restrained approach or explained the value of things like qualified investor rules, I’ve found myself shouted down as a someone who is defending an undemocratic system that locks people away from great returns. Crypto, we’re often told, is supposed to democratize finance. I’ve been a skeptic of this view for some time, there’s a lot of evidence that these high-risk deals are dicey and that less sophisticated investors often do poorly out them. I hope this viewpoint will be taken more seriously as we go forward.

For a long time, I’ve sometimes felt like I had to sit on the sidelines of some of the most innovative work because as cool as it was, it felt a bit too risky and potential business partners were not willing to wait while we did our due diligence or made the changes necessary to convince partners in a risk-averse accounting firm to join a program. I think our risk management expertise will get a bigger premium in the near future and some cool new opportunities.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.