Quantum finance is a branch of econophysics, a heterodox interdisciplinary research field that involves applying theories and techniques to solve complex problems in economics.
Implementing quantum technology to financial problems — especially those dealing with nonlinear dynamics, uncertainty, or stochastic processes — can be extremely beneficial for first movers. Faster reaction to market volatility, more accurate risk analysis, and employing behavioral data to improve customer engagement are some of the specific advantages quantum computing can deliver in the upcoming decades.
What exactly is the quantum financial system (QFS)?
The Quantum Financial System represents a fusion of advanced technologies, combining quantum computing and blockchain to create a financial ecosystem that promises to redefine how we perceive and interact with money.
It’s not just about adopting new, cutting-edge technology — it’s about reshaping the very foundation of modern finance.
If you are wondering whether the quantum financial system could be a real thing, then the answer is yes. It may sound like science fiction to some people, but this is a very genuine technology.
In fact, the concept of implementing quantum money was introduced in 1970 by research physicist Stephen Wiesner. However, it remained unpublished until 1983, and a practical way of developing it (using methods from semidefinite programming) was invented in 2013.
Today, the primary objective of the Financial Quantum System is to facilitate consistent integrity of the funds’ movement, precisely estimate uncertainty in financial models, and eliminate the shortcomings of the central banking system.
In this article, we will delve into the heart of QFS, exploring its inner workings, potential benefits, and the profound implications it holds for the financial world.
Table of Contents
Current Financial System
The financial world has evolved a lot in the past 50 years. Not so long ago, the most common way to pay while buying something was to use cash. Now we have plenty of options. Use a debit/credit card or pay with an app or cryptocurrency wallet on your smartphone. The choice is yours.
Today, the 30 largest banks in the world manage more than $65 trillion combined. According to the Bank for International Settlements, the size of the bond market is over $130 trillion worldwide and $51 trillion for the US market.
In this complex market, a vast number of financial services activities (ranging from securities pricing to risk analysis) are performed every second. Each activity requires the ability to assess short-term and long-term outcomes.
To do this, financial institutions utilize advanced algorithms and machine learning models that measure statistical probabilities. However, these models are not completely accurate — we all saw what happened during the 2008 financial crisis.
The current technology still needs to mature in many ways to fulfill promises. Thus, several financial companies are testing new processors that leverage the laws of quantum physics to process massive volumes of data at unprecedented speed. The possibilities are endless.
How Can Quantum Computing Help?
Quantum machines can revolutionize industries that require enormous computing power, including discovering new medicines, empowering deep neural networks, modeling financial markets, and developing a secure way of communication (quantum internet).
In this article, we have focused on how quantum computers can improve current financial systems.
Banking sectors, non-banking financial companies, hedge funds, and other financial institutions deal with very sensitive data like customer transactions and contracts. This data needs to be kept private and secure for a longer period of time.
Many banking activities, such as security pricing, involve a high degree of computational complexity. This complexity further increases when dealing with pricing options because it requires adapting to rapidly changing market conditions.
Thus, financial institutions are always looking for ways to efficiently determine the price of stock options while keeping the customers’ data secure. The research has shown that quantum computing has great potential to solve such critical financial problems.
When it comes to simulating quantum mechanics and other algorithms, such as Grover’s algorithm for quantum search and Shor’s algorithm for factorization, Quantum computers can easily outperform classical computers.
Basics of Quantum Computing
The working principle of quantum computers is based on quantum physics, which shows that certain properties of particles remain in two different states, or any combination of two states, at any given time. Unlike classical computers that work on dualistic processing systems (0s and 1s), quantum machines can simultaneously be 0 and 1, or a blend of 0 and 1.
Since the quantum system can exist in multiple states at the exact same time (this phenomenon is called superposition), it can perform far more complicated tasks that are beyond the scope of classical supercomputers. This opens the exploration of vast computational possibilities.
The outcomes of quantum computation are also different from their binary counterparts. They are probabilistic (instead of deterministic), which means outputs can differ even if the input remains the same. Thus, the same computation must be done several times to make sure its results converge toward a mean.
While classical computers work with bits, the basic unit of quantum information is called a qubit (or a quantum bit). It can be engineered as photons, electrons, or nuclei.
Examples include the polarization of a photon in which the two states can be the ‘horizontal polarization’ and ‘vertical polarization,’ or the spin of an electron in which two states can be ‘spin up’ and ‘spin down.’
As per the quantum laws, a qubit can be in a coherent superposition of both states at the same time. For example, a two-qubit quantum computer could have ’00’ ’01’ ’10’ ’11’ states. A classical computer would require 4 bits to achieve this.
Similarly, 3 qubits can be the same amount as 8 binary bits, 4 qubits the same as 16 bits, 5 qubits the same as 32, 6 qubits the same as 64, and so on.
To put this into perspective, a 300-qubit system can have more states than the total number of atoms in the universe. Even the most powerful classical supercomputer could never process that amount of data.
That is why financial institutions are showing a great interest in quantum computing. While no quantum machine is yet advanced enough to perform tasks that a classical computer can’t, great progress is underway.
Quantum Money System
In the standard model of banking, money is recognized in three different forms: commodity money, fiat money, and fiduciary money.
We have also seen the rise of cryptocurrencies in the past decade, but it is not yet widely recognizable. It’s a digital payment system that doesn’t have any central issuing or regulating authority. Instead, it is based on a distributed public ledger known as the blockchain, a record of all transactions held by currency holders.
Quantum money takes things to the next level. It applies quantum cryptographic protocol to generate and validate currencies. Since arbitrary quantum states cannot be perfectly copied, it is impossible to forge quantum money.
The idea looks great on paper, but it is not feasible to implement with current technology. This is because quantum money requires us to store the arbitrary quantum states in quantum memory, a quantum-mechanical version of conventional computer memory.
Although years of research and experiments have enabled quantum memory to store qubits, it can do so only for a very short time. Many research institutes across the world are working on new materials to create memories that could hold the quantum information carried by light.
Benefits Of Quantum Financial System (QFS)
In contrast to traditional computers, where doubling their power demands roughly twice the number of transistors, quantum computers can double their power with just one additional qubit. This makes them especially advantageous for early adopters who can harness this efficiency to their benefit.
Quantum computing has the potential to empower financial institutions to address highly specific business challenges and potentially redesign certain operational processes in the coming decade.
1. Customer targeting and prediction modeling: Quantum computers are exceptionally good at finding hidden patterns in complex data structures, performing classifications, and making accurate predictions.
2. Fraud detection: Each year, financial institutions suffer substantial revenue losses, ranging from $25 billion to $50 billion, due to fraud and poor service management practices. Existing fraud detection systems are not that reliable. They return 80% false positives, causing the banking sector to remain at risk most of the time.
Quantum computing may offer a definitive edge in the battle against payment fraud. Its ability to harness exponential speed through quantum superposition and entanglement offers the potential to reevaluate many potential solutions, ultimately leading to the optimization of fraud detection algorithms.
3. Client management: Quantum computing can transform client management in the financial sector by improving data analysis, security, risk management, operational efficiency, and personalization. This can lead to a seamless and highly satisfying customer experience.
4. Portfolio management: Quantum computing has the potential to speed up asset-pricing models and cultivate performance improvements. It can make a myriad of optimization calculations in a fraction of the time without using approximations.
Its combinatorial optimization capabilities could help investors improve portfolio diversification, rebalance portfolio investments according to the market conditions and end goals, and efficiently streamline trading settlement processes.
5. Enhanced Security: Since QFS employs quantum encryption (an ultra-secure technique that leverages the properties of quantum physics), it can offer unparalleled security, making it extremely resistant to data breaches and financial theft.
6. Decentralization: QFS promotes decentralization, minimizing the reliance on intermediaries and lowering transaction costs. It is also designed to be accessible globally, which means individuals and entities can engage in cross-border transactions more easily.
7. Smart Contracts: QFS supports smart contracts — these are automated agreements (encoded into computer programs) that execute themselves when predefined conditions are met. They eliminate the potential for human error, minimize the risk of disputes, and reduce the need for trust in intermediaries.
8. Reduced Settlement Risk: It is the risk that one party in a financial transaction may not meet its obligations, which may eventually lead to a failure in the settlement process. QFS mitigates this risk through near-instantaneous transactions, smart contracts, and blockchain technology that maintains a transparent and immutable ledger of all transactions.
9. Integration with Artificial Intelligence: QFS can leverage AI algorithms to improve data analytics, risk assessment, and decision-making. It can also interact with IoT devices to provide real-time data on assets, supply chains, and more.
Recent Developments In Quantum Finance
Progress made in the last ten years towards quantum supremacy proves that quantum computers are more capable of solving some specific problems than any conventional computers.
In 2014, for example, a team of researchers from the Netherlands harnessed the capabilities of quantum mechanics to develop a fraud-proof technique for authenticating a credit/debit card that is virtually impossible to thwart.
In 2018, Canadian researchers published a quantum algorithm for the Monte Carlo pricing of financial derivatives, demonstrating a method to create relevant probability distributions in quantum superposition and a technique to extract the price of financial derivatives through quantum measurements.
In 2020, David Orrell proposed a binomial option pricing model based on a quantum walk that can be run directly on a quantum device. In the same year, D-Wave quantum computers were used to solve the Portfolio Optimisation problem. The results were very promising: the performance of the D-Wave hardware (though limited in size) is comparable to superfast classical computers.
In 2021, a group of researchers developed quantum algorithms for high-frequently statistical arbitrage trading by using variable time condition number estimation and quantum linear regression.
In 2023, researchers at IBM Quantum, in collaboration with the University of California, Berkeley, and Lawrence Berkeley National Laboratory, conducted an experiment to test the capabilities of a 127-qubit quantum computer against a state-of-the-art supercomputer. They found that despite the noise issues, quantum computers have the potential to excel in specific computational tasks.
Our paper, recently published in Nature, reveals how measurements affect a web of entangled qubits and for the first time, measurement induced quantum teleportation. ↓ https://t.co/eLOSDzC4Bh
— Quantum AI (@GoogleQuantumAI) October 30, 2023
The Present and Future Of Quantum Finance
Quantum computing technology isn’t fully developed yet. In fact, most of its benefits and applications are still conceptual. Thus, the whole banking sector is left with two choices:
- Either wait for the technology and react only when opportunities or threats are identified.
- Or start connecting with the quantum world, identify use cases, and integrate quantum security solutions.
The second option seems better. Many investment banks and financial services holding companies, including JPMorgan Chase, HSBC, and Wells Fargo, have already started pouring millions of dollars into quantum research and innovation programs.
A large body of research and engineering work has been dedicated to the realization of quantum algorithms with substantial polynomial speedups in data-loading and data data-processing subroutines.
So far, no practical application of quantum computing with exponential speedup over its classical counterpart has been invented, but numerous promising models have been proposed.
IBM, for example, has managed to pack 127 qubits in its proprietary quantum-computing chip. The processor uses multiple layers to host signal-carrying wires, which allow precise readouts of the qubits. Although the technique is common in classical chips, it’s a huge achievement in the world of quantum computing.
It is expected that quantum computers will surpass the capabilities of classical computers by the end of 2030. Tech giants, including IBM and Google, are working on quantum machines that can hold hundreds of quantum bits. IBM has made its aspirations more concrete by releasing a blueprint for the development of quantum computers, which includes the aim of developing a 1000-qubit computer.
We are thrilled to announce the launch of 20-qubit quantum computer for Finland.
We are proud of our amazing team, our partner, @VTTFinland, and all those involved.
— IQM Quantum Computers (@meetIQM) October 10, 2023
This will have a disruptive impact on numerous industries, particularly finance. In fact, finance is estimated to be the first sector to benefit from quantum computing in the short and long terms.
Financial Institutions Adopting QFS
Some financial organizations have been actively studying and experimenting with quantum and blockchain technologies. The most popular ones are
JPMorgan Chase, in collaboration with QC Ware, completed a study specifically focusing on the application of quantum techniques to “deep hedging.” Deep hedging is a financial practice used to reduce risk in portfolios by employing data-driven models that take into account market frictions and trading constraints.
HSBC is the first bank to become part of a quantum-secured metro network established by BT and Toshiba. This network employs Quantum Key Distribution, a cryptographic technique that leverages the principles of quantum mechanics to create highly secure encryption keys. The bank is also working with Amazon Web Services to explore quantum-secured communication and data transfer in the context of AWS edge computing.
Wells Fargo‘s developers have published a series of research papers, with more to come, that outline algorithms and software solutions designed for use on quantum computers. These papers are not just theoretical concepts but rather practical applications that have been tested on quantum machines.
They have also partnered with IBM, renowned academic institutions like MIT and Stanford University, and quantum-focused companies like QCWare and Oxford Quantum Circuits to advance quantum coding and testing on real quantum computers.
Goldman Sachs has undertaken well-defined benchmark problems in finance and estimated the performance specifications that a quantum computer would need to surpass in order to provide a real advantage. They have partnered with Quantum Science Laboratory and Amazon Web Services to evaluate various applications of quantum computing to address real-world financial problems.
The future advancements of quantum computing within banking and financial institutions are not without challenges. Following are the major things that have to be dealt with in coming years:
- Ensuring the reliability and scalability of quantum hardware for large-scale financial systems
- Implementing robust quantum error correction mechanisms
- Integration with existing legacy systems
- QFS adoption must comply with existing financial regulations
- Developing more energy-efficient quantum hardware
- Establishing industry standards for QFS to ensure compatibility, security, and consistency across the financial sector
In addition to these challenges, we also need to identify what problems quantum machines can efficiently solve, improve the interface for better accessibility, and extend the interest in quantum computing beyond the elite group of physicians and mathematicians.
Addressing these challenges and adopting quantum-based solutions is not a short-term process. It’s a long-term journey, and it depends on the financial sector’s capability to define problems, adjust the infrastructure, and involve skilled personnel in the process.
Frequently Asked Questions
What are the most popular quantum algorithms?
A quantum algorithm is a step-by-step instruction, where each step can be performed on a quantum computer. The term ‘quantum’ is used for those algorithms that utilize some basic features of quantum computations, such as quantum entanglement or quantum superposition.
These algorithms can be applied in various fields, including search and optimization, cryptography, solving large systems linear equations, and simulation of quantum systems. The five most popular quantum algorithms are —
- Shor’s algorithm factors integers in polynomial time
- Grover’s algorithm can quickly solve unstructured search problems
- Simon’s algorithm solves a specific problem exponentially faster and with fewer queries than the best deterministic classical algorithm.
- Bernstein–Vazirani algorithm was developed to prove an oracle separation between complexity classes BPP and BQP.
- Deutsch–Jozsa algorithm was the first to show that using a quantum computer as a computational tool for a particular problem can be advantageous.
When will the quantum financial system start?
The era of the quantum financial system is about to begin. Within the next decade, quantum computing will most probably become one of the mainstream solutions in the finance sector.
According to Spherical Insights, the quantum computing market size will exceed $143 billion by 2032, growing at a CAGR of 26.5%. The early adoption of quantum-based technologies in the finance sector is expected to fuel the market’s growth worldwide.
Which banks are investing in quantum computing?
J.P. Morgan, Goldman Sachs, Citigroup, Mitsubishi Financial Group, Barclays, Wells Fargo, BNP Paribas, HSBC, and Japan Post Bank — they all are pouring millions of dollars into this technology; some have started experimenting with quantum computing applications.
Can you invest in quantum computing?
Yes, there are a lot of opportunities available for investors who want to bet on quantum computing technology. A number of companies working in this area are listed on the New York Stock Exchange. A quantum computing ETF (named defiance quantum ETF) is also available to get more general exposure to this industry.