Distributed ledger adoption in securities will split front-to-back
Either the distributed ledger is the greatest revolution in financial services for a generation, or it will make little difference to anything, according to the strongly divided opinions expressed by speakers at the Mondo Visione Exchange Forum in London last week.
“It’s possible blockchain will do to financial services something akin to what shipping containers did for the transport industry,” said Peter Randall, chief operating officer at blockchain-based post-trade company SETL. “In payments, it will be a change we haven’t seen in our lifetimes and probably won’t see again. It’s the most exciting thing I’ve seen in my career.”
Many, if not most, financial institutions are currently exploring the technology, particularly through a partnership between nine major global investment banks and financial technology company R3. Advocates of the technology such as Santander argue that it can produce huge efficiencies that will save up to $20 billion a year, according to the bank’s own estimates.
However, not everyone is convinced. “In the near term it’s not going to change anything,” said Michael Mainelli, executive chairman of Z/Yen Group. Why would you rebuild the exchanges, the market infrastructure etc.? It’s not going to happen.”
“It’s not new technology,” he added. “Mutual ledgers go back 40 years.”
Despite the initial clash of viewpoints, participants could agree on one thing – that the impact of the new technology is most likely to be felt in the post-trade space. The difference appears to be not whether blockchain will make a difference, but the extent to which it will do so.
“The future of exchanges is rosy,” added Randall. “The post-trade businesses such as the CCPs will see the competition coming. When you can see which LEI moved which asset where and why, that will drive huge changes in the market.”
Other panellists felt that blockchain is best considered within the context of the business world in which it operates, and specifically within the context of financial services startups and non-bank entrants entering the financial sector for the first time. Moiz Kahari, VP, advanced platform engineering, London Stock Exchange, pointed out that there are businesses that see their role as changing the world. It would be possible, he said, for multiple asset classes to go onto the chain, adding that it was not a technology issue but a business one to decide how to roll out the technology and how to prioritise it.
“It can work in some areas, such as trade reporting,” said Mainelli. “We will see an increase in the sharing economy, which will boom. This will change how trusted third parties act. Blockchain takes away the safeguarding problem, because it can’t be changed. But there are many questions. Public or private? P2P or not? There are many ways to do this. Will there be one model or a few different ones? Will it be for the many, or for the multitude? Distributed ledgers are very easy to build, so the answers to these questions remain to be seen.”
There was one final point that needed attention, however. Randall said that the trick to making the whole thing work would be to ensure the models talk to each other. Otherwise, he said, the result would be like a mobile phone that can only talk to other phones on the same network. “Interoperability is key,” he said. “You need to be able to move central bank money with it – that is the means of exchanging value.”