What impact will the Blockchain have on investment banking in terms of the design of an institution? Let's say that we get the world to allow the Blockchain to evolve the way the paper proposes. Then what? How will this affect the way investment banks will be designed and how will they function if it is based on a Blockchain architecture?

1. BLOCKCHAIN:
INVESTMENT BANKING’S
SOTERIA
HOW BLOCKCHAIN WILL CHANGE THE GAME
Jorge Aspas, Ximena Carrizosa, Diego Dutriz, Youmna El Turk, Julius Kühn,
Théo Tortorici, Giulia Troina

2. 2BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
A double-edged
sword - Oppor-
tunity and natu-
ral regulator
The blockchain, a technology first lev-
eraged for the use in cryptocurren-
cies, is an incorruptible ledger tech-
nology that may help banks regain
public trust while potentially being a
lucrative business model.
Since Black Monday in 1987 the global
community had to witness at least nine
major financial crises, at the root of
which have always been investment
banking institutions.
While citizens and the real economy of-
ten struggle years, sometimes even dec-
ades to recover. Banks quickly return to
pre-crisis profit levels and compensation
packages continuing business as though
nothing had happened.
Blockchain technology could be the cure
to this systemic short-coming, by intro-
ducing transparency and incorruptible
accountability.
Foreword
For the first time in human history for-
giveness rather than forgetfulness can
be part of our institutional design.
In an effort to conceptualize the impact of
blockchain on investment banking, we
first establish why banks will not be the
same in the age of blockchain. We then
tried to identify areas of change and to ul-
timately conclude what the investment
bank of the future will look like, developing
its institutional design and interpreting fu-
ture stakeholder interaction and brand
perception.
A particular focus of the work has been
identifying the potential benefits banks,
regulators and taxpayers have through
blockchain technology.
As part of this analysis we have drawn on
several industry reports, expert opinions
and our personal predictions. The es-
sence of our analysis can be distilled to
following three sub questions:
Why banks need to change?
How will banks change?
What are the broader implica-
tions for the organization’s
stakeholders?
1
2
3

3. 3BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
1 Why banks need to change?
Since the Garn-St. Germain Deposi-
tory Institutions Act in 1982 the US fi-
nancial sector has grown from 4.9%
GDP to 8.3% GDP in 2006 at the peak
of the financial crisis. While espe-
cially investment banks have grown
in size they have essentially remained
unchanged in their institutional de-
sign. This design is increasingly un-
sustainable for them and unfeasible
for society.
The regulation introduced in response to
the global financial crisis in 2008 has
triggered a number of strategy reviews in
the leading investment banks that led to
short-term scale-backs from certain ge-
ographies, customer segments and as-
set classes.
Irrespective of these restructuring efforts
the average return on equity (ROE) has
continuously deteriorated since the swift
recovery in 2009 (see below).
Source: EY
Further, the policy recommendations
made by the Basel Committee on Bank-
ing Supervision (BIS) such as funda-
mental review of trading book (FRTB),
the credit valuation adjustment and spe-
cifically the capital requirements are
making formerly lucrative lines of busi-
ness like fixed income trading and
prime brokerage increasingly difficult to
attain.
While demand for many of these services
has remained strong, regional and spe-
cialized players are increasingly challeng-
ing industry behemoths. Figures 2 and 3
show how these business areas have
shifted towards regional players and bou-
tique firms.
Source: EY
Source: EY

4. 4BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
In a market study on the future of in-
vestment banking, EY has summarized
the past, present and future of capital
market activity in above diagram con-
cluding that unless investment firms
fundamentally rethink the way they op-
erate and interact with their environ-
ment they are destined for a short fu-
ture.
The major long term goals banks
should concentrate on are:
Restructuring the operations towards
a more mindful legal entity. Clearly de-
fining risk appetite, customers and ge-
ographic footprint. Leveraging tech-
nology to develop new operating mod-
els. Protecting the business through the
right organizational culture. Making
compliance and risk management a
priority.
What is interesting about these goals
and generally the majority of this indus-
try report is that it focusses on the need
to reinvent their organization.
The fundamental framework of every
organization is naturally its business
model.
In their report on global investment bank-
ing, McKinsey & Company has provided an
insight into what future business models of
capital market actors might look like.
Apart from the now evident business rea-
sons on why banks need to change, soci-
ety needs banks to change.
The global crisis of 2008 demonstrated the
devastating economic and social effects of
a system not immune to risks.

5. 5BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
As new technologies emerge, new
forms of risks appear alongside the old
ones. Some of these new technologies
like artificial intelligence or Blockchain
hold a great potential but need to be de-
veloped in a way that maximizes oppor-
tunities and minimizes the risks.
The transformation across the financial
services system fueled by the fourth in-
dustrial revolution brings a number of
risks that could affect the system stabil-
ity both in old and in new ways. The
WEF report on the Financial Stability,
Innovation and Economic Growth iden-
tified two types of systemic risks: one
that the financial sector understands
reasonably well because it had to face
them in the past during the last crisis
and a new source of risks fueled mostly
by technological innovation.
The “well-known” systemic risks include
for example credit bubbles related to the
expansion of easy money and exces-
sive risk taking in an economy. Track-
ing the amount of credit is critical to
safeguard financial stability. Financial
market volatility, the second of the “well-
known” systemic risks, is constantly
increasing and developments in electronic
and algorithmic trading have further fueled
the debate about actual and perceived li-
quidity in the capital markets. Finally, con-
duct oversight of market participants is
crucial as poor conduct undermines trust
and confidence in the financial system.
Poor conducts encourage participants to
withdraw and sanctions can bear signifi-
cant systemic risks.
However, new forms of risk threaten the
integrity of the financial system. These
risks stem from the digitalization of the fi-
nancial services. Banks are gradually out-
sourcing more and more of their activity to
external service providers. The more
widespread use of electronic payments
and the fragmentation of client-facing ap-
plications increase the expose to cyber-at-
tacks due to the multitude of points of con-
nection. This new paradigm increases the
complexity of harmonizing data across ac-
tors and makes necessary a more robust
financial architecture to ensure the integ-
rity of the data exchanged or stored.
The Finance Ecosystem
Below graphic is a simplified illustration of the financial service ecosystem and
the operations of the different players, these may of course vary on the firm
level.
Source: Practicalanalytics

6. 6BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
2 How will banks change?
What sets blockchain technology
apart from current data infrastruc-
ture alternatives is that it introduces
complete transparency and unprec-
edented efficiency while providing a
new level of security. Since large
scale investment banks are fully
digitalized operations, few depart-
ments remain unchanged in the ad-
vent of blockchain.
The current form of blockchain is de-
signed so that a “hash”, the output of a
sophisticated mathematical algorithm
based on the input of the transaction
details, is compared with
the published “hash” of previous transac-
tions. Upon verification, the hash is added
to a distributed ledger i.e. shared data-
base. The verification process and distrib-
uted nature of the system i.e. cross-com-
pany system standardization ensures
both security and transparency, efficiency
is the result of the two combined.
Below diagram provides a comprehensive
yet condensed overview of where distrib-
utive ledger technology will have the
greatest impact from a technical point of
view.

7. 7BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
However, most of the slack and fraud
blockchain would circumvent in the
current system is man-made. In anti-
money laundering (AML) and know-
your-customer (KYC) procedures, re-
ducing the amount of “trusted” interme-
diaries could potentially produce $3-
5bn in global annual cost savings ac-
cording to a Goldman Sachs report, as
most of the costs here come from
headcount. This figure illustrates just
how much money is wasted on pro-
cesses that in a world of blockchain
would no longer exist.
Apart from the procedural slack re-
duced by blockchain, the human error
and active malpractice in finance
would be much harder to facilitate. In-
famous fat finger trades like the $6bn
slip-up of a Deutsche Bank trader in
2015 and trading scandals such as the
$2bn losses from unauthorized trades
by former UBS banker Kweku Adoboli
are no longer possible in system run on
self-executing smart contracts.
Therefore, rather than diving too
deep into the procedural changes
blockchain will introduce into global
finance, this report will try to inter-
pret how the changes will affect hu-
man interaction in the firm. Based
on this we will try to anticipate what
human attributes would come to the
forefront in the transformed institu-
tion.
Blockchain is secure and immutable by
design, and its implementation at vari-
ous level of the activity of the firm im-
prove the trust of the different agents
who do not rely on a centralized au-
thority anymore.
The design of this technology therefore
has the ability not only to change the
firm’s processes but to have a deep im-
pact on human behaviors.
A firm can be understood as the set of
contracts, a set of rules that define the re-
lationships between agents. That set of
rules, and the behaviors enforced by
these rules define a system. Once agents
decide to contract, the scope of that con-
tract defines the boundaries inside which
the agent can be held accountable.
In a future scenario were Blockchain the
basis of enterprise IT, the people’s func-
tion in organizations and human re-
sources (HR) as a concept handling how
employees contract with the company
changes. The way we envision the hiring
process happening in the future is through
the creation of “professional blocks” con-
taining all the certificates, diplomas, ac-
complishments and information of an indi-
vidual. All this information will be stored
on the immutable ledger of the Blockchain
and can therefore be consulted by HR
during the recruitment process conse-
quently improving trust and reducing
fraudulent certifications. The use of Block-
chain and smart contracts will fluidify the
job market and make the outsourcing of
certain job activities to contractors easier
and more trustworthy for both parties.
Furthermore, employee feedbacks about
bosses can be added to their personal
blocks and therefore promoting a better
work atmosphere by incentivizing people
to really act upon feedback, making the
work space a more inclusive place, ac-
tively promoting better leadership.

8. 8BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
Currently, career advancement often
only partially depends on personal per-
formance and greatly on the superior’s
good graces.
Smart contracts will bring more objec-
tivity and transparency into career ad-
vancement. In the same way, compen-
sations determined by smart contracts
will be much more objective when mile-
stones become quantifiable and trans-
parent. Advancement will be more
merit based and less relying on negoti-
ation or office politics so it will create a
greater sense of equality in the com-
pany and less discrimination based on
personal biases.
Blockchain will also fundamentally im-
pact the relationship with the client,
since every individual possesses a
professional block that records profes-
sional events and milestones in work
activity. Giving prospective business
partners access to one’s professional
blocks is now mandatory. This allows
banks on the one hand and customers
on the other hand the ability to make
more informed decisions about who
they are doing business with. If clients
for example have been involved in ille-
gal activities or if financial advisors
have had a track record of poor deal or
malpractice, parties now consciously
decide whether to conduct business
with one another.
Blockchain technologically ensure trust in
professional networks by improving KYC
compliance and allowing a more reliable
vetting of customers and professionals.
Blockchain’s secure and immutable
ledger thus changes the paradigm of the
decision making when it comes to enter-
ing in a business relationship.
Since the entire professional history is
recorded on an individual’s professional
block on the Blockchain, that person can
be held accountable for everything that
has been recorded. This accountability
does not merely depend on what counter-
parts can remember but rather what they
are still willing to hold against that party.
With regards to the relationship between
investment banks and governments or
regulatory institutions, the implementation
of Blockchain technology would facilitate
the audit process both pre- and post-trade
for regulators.
Further, it would allow real-time or near
real-time information into all parties in-
volved in a malpractice case, thus ensur-
ing that justice would be served holisti-
cally and not only partially as is today.

9. 9BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA
3 What are the broader implications for
the organization’s stakeholders?
Recently, we have witness a shift in
the nature of the organization of pro-
ductive activity. We started with large
centralized operators, who are pro-
ducing value and delivering it to a
passive consumer. Slowly we have
seen the emergence of platforms
where consumers become prosum-
ers, both creating and consuming
value. The function of these interme-
diaries is not anymore to create the
value but rather to coordinate the in-
dividuals and to aggregate the value
into one service that they can then
provide back to the users. This cre-
ates a discrepancy, the value created
by the crowd is extracted and turned
to profits by these intermediaries.
The Blockchain is the response to
create a more egalitarian redistribu-
tion of the profits generated by the
creation of value. Why is Blockchain
so compelling? Because the technol-
ogy creates trust, a function that was
reserved to these intermediaries.
The whole idea of self-enforcing
smart contracts creates a shift in par-
adigm. The status quo is that the law
defines what is deemed acceptable
in society. Rules and regulations
specify some codes of conducts re-
garding specific sets of actions.
Then, agents carry out their activities
and if they are not in accordance with
the rules, these agents are being
prosecuted and possibly sanctioned.
The introduction and development of
smart contracts creates an environ-
ment where only the actions included
in the scope of the contract can be
performed. We go from a society
where the institutionalized authority
sanctions wrong behavior to a soci-
ety that by design doesn’t need to
sanction anything anymore, because
only what is in the scope of legal
smart contracts can be executed.
Smart contracts operating on the
Blockchain allow a new form of or-
ganizational structure: the DAO, de-
centralized autonomous organiza-
tion. Theoretically this design elimi-
nates the need of human intervention
in the governance of the organiza-
tion, because interactions inside the
organization are run and regulated
exclusively by the code that has been
deployed on the Blockchain.
At the scale of human interactions in
the organizations, we will see the
emergence of dynamic meritocracy
where actors will be adequately re-
warded given the amount of their
contribution and if their value system
is aligned with the value system of
the whole organization. This is the
stepping stone of the decentralized
yet coordinated organization.
Investment banks have become
nefarious after 2008, the public
started to question the legitimacy
of these big monolith to act as
such powerful intermediaries.
These institutions have seriously
eroded the public trust. In this con-
text, Blockchain technology and
smart contracts seem to bear the
opportunity of building a new sys-
tem based on trust and transpar-
ency.

10. 10BLOCKCHAIN: INVESTMENT BANKING’S SOTERIA