From left to right: Thomas Jessop, Kfir Godrich, Matt Harris, Murray Pozmanter
Activity surrounding blockchain technology is running at a feverish pitch – there’s strong investor interest and consortiums of tech startups and financial firms continue to grow. Yet, despite this flurry of activity, the foundational building blocks for this emerging technology still need to be established to make it a viable solution to streamline the current post-trade process.
Those building blocks include the creation of standards, protocols and the development of use cases. These topics were addressed at DTCC’s 2016 Blockchain Symposium in the session, “From Today to Tomorrow: Building a Roadmap for Blockchain.” Speakers for this session represented the intersection of technology, venture capital and financial services. The speakers addressed a receptive audience of nearly 500 attendees.
Thomas Jessop, Global Head of Technology Business Development, Technology Division, Goldman Sachs, moderated the panel. In his introduction, Jessop called blockchain “a panacea for what ails our industry.” He said it could potentially reduce operational and capital costs by making the entire post-trade process more efficient and faster. Still, he understands there’s plenty of work ahead.
“Despite the problems of the technology, and potentially significant benefits from it, there’s no Big Bang moment,” Jessop said. “Blockchain is an enabler but is not a solution unto itself. The adoption of blockchain in capital markets may take several different forms and require integration with existing legal, operational and regulatory systems.”
Matt Harris, Managing Director at Bain Capital Ventures, acknowledged that cost containment in the back office is a key driver and main attraction of blockchain technology. “There’s a lot of momentum from bitcoin and checks are being written” by investors, he said. Besides the flow of venture capital money, Wall Street firms have also invested in tech start ups like Digital Asset Holdings and R3.
Investor sentiment, however, doesn’t always translate into financial wins. “What that means for the timing, success and profit potential of eventual deployments [of the technology] is a secondary issue and one in which I remain cautious,” he said.
Kfir Godrich, Global Head of Technology, BlackRock, said the firms and people researching blockchain are coming up with many interesting ideas and the “coolest technologies.” But he added he wouldn’t be surprised if 90% of what people are experimenting with today does not work out, whether for regulatory reasons or just shortcomings of the technology. “Making the right bet on the investment side, that’s a real tough point right now,” he said.
- Thomas Jessop, Global Head of Technology Business Development, Technology Division, Goldman Sachs (moderator)
- Kfir Godrich, Global Head of Technology, BlackRock
- Matt Harris, Managing Director, Bain Capital Ventures
- Murray Pozmanter, Managing Director, Head of Clearing Agency Services and Global Operations Client Services.
Harris said that when an industry is evaluating how to advance its technology, it looks at two things: What is doable and what is causing the most pain. He mentioned derivatives processing as an example of a current pain point. He referred to the creation of DTC and the back-office crisis more than 40 years ago as an example that created change.
He put that into the context of today. “Where is the pain similarly acute here? Either regulatory pressure or trade failing or costs spiraling out of control or capital being tied up in a way that is driving change rather than merely encouraging change,” Harris said. “I think you may see more radical use cases emerge versus incremental use cases because that’s where pain is most acute. It won’t be quick but pain is what drives human behavior.”
Murray Pozmanter, Managing Director, Head of Clearing Agency Services and Global Operations Client Services, DTCC, was in agreement. He believes the new technology will be the answer for the asset classes that are currently processed manually and require multiple steps to clear and settle. He cited loan processing and repo as two areas that could be aided by blockchain technology. For equities, fixed income and derivatives, he said that he believes new technology companies will integrate and plug in to the existing post-trade ecosystem.
He offered his comments about how blockchain might eventually be implemented: “It’s incredibly interesting how much attention the technology has gotten,” he said. “There are excellent use cases for it where we can improve the current ecosystem. The real challenge for the industry as a whole is going to be figuring out what exactly is the problem that we’re looking to solve and not implementing technology for technology’s sake.”
He also pointed to reference data as a possible use case to explore. “When you think of the amount of over-processing and inefficiency that there is in the industry just because of different reference data or inaccurate reference data, not just from firm to firm but even within different systems within the same firm, it seems to be a natural spot to introduce distributive ledger technology as even the low-hanging fruit to get started,” he said.
Between Each Other
Jessop asked panelists if they could see a day, after standards and protocols are established, when investors could pair off in the post trade without an intermediary. Both Godrich and Harris answered by pointing to the technology’s potential.
Harris said that the level of talent involved in researching blockchain technology is “unprecedented” in his 20-year career in venture capital. For the last 15 years, Harris has specialized in financial technology and blockchain is the most interesting investment he’s seen, he said. Harris explained that the current class of investors and technical talent involved in blockchain wouldn’t normally be involved in the back office. “What gives me hope is that when you take extraordinary talent, you will come up with interesting [ideas],” he added.
On the topic of collaboration, Jessop said that Wall Street has a very strong history of working together effectively on issues related to infrastructure. Harris concurred noting that because firms don’t compete in the area of post-trade, he could see collaboration, as it would benefit everyone.
On the topic of regulation, Pozmanter commented it will be important to keep regulators in the loop as the technology develops for blockchain. With the right level of transparency, the regulators will be supportive of the new technology: “Having the regulators at the table early in the process will be absolutely vital,” Pozmanter said. “It has already started.”
The discussion centered on when the industry might see the first test of blockchain in production with a small group of users. Pozmanter could see a pilot in one to two years. “The industry has had a good track record for infrastructure projects,” he said. Jessop agreed with Pozmanter’s timeline for such a pilot.
For a “mass adoption,” Pozmanter saw a four-year horizon. He predicted there will be pockets of adoption and some firms will be on board from the start, while others will see it as less of a priority. Godrich went with a five-year time frame. “There are a lot of smart analysts here in this room and the number they are using is five years,” he said. “I’m going to keep with their vision because they see more things than we can.”