From left to right: Larry Tabb, Patrick Byrne and Fredrik Voss.
A luncheon panel at the 2016 Blockchain Symposium addressed the different models of distributed ledger technology, the challenges they face for market adoption and the future role these models may play in the industry.
The debate centered on permissioned vs. non-permissioned blockchain technology models, the level of post-trade transparency, and the potential for investors choosing their own settlement cycle. Larry Tabb, CEO of Tabb Group, moderated the discussion. Panelists Fredrik Voss, Vice President of Blockchain Innovation, Nasdaq, and Patrick Byrne, CEO of Overstock, offered their perspectives and explored several use-case scenarios. Byrne is a proponent of same-day settlement and is the CEO of t0, a subsidiary of Overstock that develops distributed ledger technology for post-trade processing.
Challenges with Market Adoption
Byrne mentioned that the main challenge has been to identify where, in the existing financial infrastructure, blockchain technology can be plugged in and put to good use. Given that blockchain is predicted to be a disruptive technology, there is also the challenge of finding interested parties in financial services looking to break away from the current post-trade structure.
“We don’t want to create a completely parallel ecosystem and try to get people to buy into it,” he said. “The biggest thing is both figuring out where we want to be plugged in and who we want as our partners.”
Voss, who leads Nasdaq’s blockchain innovation initiative, described the challenge to select valuable blockchain opportunities as standing “with a hammer and everything you believe you see is nails.” One of the places Nasdaq saw an opportunity was the U.S. private equities market, as it now provides private companies with the ability to issue assets in blockchain format, rather than physical certificates, which allows for peer-to-peer transfer of those digitized assets without the involvement of a trusted third party.
Permissioned vs. Non-Permissioned Ledgers
There is considerable debate in the financial world regarding the use of permissioned or non-permissioned ledgers. The main difference between the two is that a permissioned ledger network allows participants to restrict who can participate in the consensus mechanism of the network, bringing some type of regulation into the world of blockchain technology. An audience poll taken during the panel revealed that 78% of attendees believe a permissioned ledger is the best approach for the industry.
Voss explained that Nasdaq uses a permissioned ledger for its U.S. private equities market as well as for a proxy that is being developed for future deployment in Estonia but could move to a permissionless system down the road.
“We have a number of criteria and everyone who meets that criteria, we have to admit,” Voss said. “But we set the criteria under some regulatory framework.”
Transparency vs. Anonymity
PANELISTS- Larry Tabb, CEO of Tabb Group (moderator)- Patrick Byrne, CEO of Overstock- Fredrik Voss, Vice President of Blockchain Innovation, Nasdaq
Another topic of debate was the need for varying amounts of transparency at different points of a trade’s lifecycle. For example, traders want anonymity to prevent tipping off the market, while regulators need greater transparency into the order to better understand its potential for increasing systemic risk.
“We need to create adaptations of the technology so it can support different market models because the coconut market doesn’t have the same requirements as the tomato market,” Voss said.
Byrne described it as “a bit of a red herring,” pointing out flaws in the current system and providing scenarios of illegal trades that are broken up into different markets to prevent an audit trail.
Varying Settlement Cycles
The panelists also debated the practicality of blockchain technology’s real -time trade settlement and how it could be adapted to the current financial services market. Byrne mentioned that the motto of t0 is that the trade itself is the settlement, while Voss explored the idea that blockchain technology could be developed in a way to accommodate varying settlement cycles, adding that a delayed settlement is often preferable for certain markets.
Since blockchain technology settles trades in real time, it offers the opportunity for varying settlement cycles.
“I think we will have a greater choice of market models,” Voss said. “I can even think that we in the same market allow participants to select the pace at which they want to settle, which has been challenging to do in the market today. So I can see that the technology offers benefits. Does it mean that every single transaction and every single asset will go to T+0 in ten year’s time? No, of course not. There are other forces that play a role in that decision.”
Byrne reiterated this point, saying that one of the advantages of blockchain technology is its ability to let a market develop by ultimately allowing issuers to choose their settlement cycle.
As the panel wrapped up, it was clear that the emergence of blockchain technology will serve as a looking glass for market leaders and analysts to understand the various areas of the post-trade fabric that can be further enhanced.