(left to right) Jennifer Peve and Thorsten Peisl
What benefits can digital ledger technologies (DLT) like blockchain deliver to the financial industry? How will these technologies be implemented, and what challenges will ensue?
A group of blockchain experts explored these and other questions in a wide-ranging panel discussion at the Disruptive Technologies Forum 2016 held in London on November 29th.
The panel, moderated by Financial Times reporter Izabella Kaminska, included Jennifer Peve, DTCC Executive Director of FinTech Strategy; Richard Gendal Brown, Chief Technology Officer of R3, Thorsten Peisl, CEO of RISE Financial Technologies, and Paul Vine, Partner at global law firm Norton Rose Fulbright.
It’s Not Bitcoin
The conversation was timely, as many look to 2017 as the year many blockchain projects will move into production in financial services. Panelists offered several visions of what the future holds as the technology begins to take hold.
For Peisl, the promise of DLT is its ability to decentralize post-trade functions and change the way counterparties interact by building certain interactions into the technology itself.
To Peve, the objective is private permissioned networks based on data standardization, one in which “everybody is using the same database and the schemas and the standards around it.”
She cited DTCC’s Trade Information Warehouse (TIW) as a candidate for re-platforming as a DLT network, to let all users share the same information in real time. Through a distributed network DTCC could expand TIW’s services, Peve said, and deliver the added benefit of helping users “streamline their own organizational infrastructures.”
Bitcoin was mentioned repeatedly during the discussion, but described as an inspiration rather than a model for new technologies that can be useful in finance.
It’s a mistake, said Brown, to think of DLT as replicating bitcoin for the financial sector. Bitcoin is an efficient way to put cash into a ledger and move it around easily, beyond the reach of governments and regulators, he said, but the financial sector has different needs. He said DLT use cases being explored in the industry include: know-your-customer analysis; reducing trade-confirm errors in markets lacking centralized solutions; data sharing that does not involve asset transfers.
Open Sourcing for a Multi-Platform World
Will the industry end up being served by a single blockchain? Kaminska asked. No, panelists and audience members concurred—in part because governments and regulators won’t allow it.
Discussions with regulators regarding DLT implementation are in early stages, Vine noted, but “I think . . . you will end up with...multiple oligopolistic systems”—likely three to 10 “big players on the blockchain space in the future.”
Brown said he has never believed the market would converge to a single blockchain, because of regulatory constraints as well as the “collective action” problem of getting multiple parties to agree on design and build a single platform.
In the multi-platform world that DTCC envisions, said Peve, interoperability will be important, which is driving DTCC to work with technology providers whose “base code is contributed or a part of open source.”
Others echoed the preference for open sourcing of code. With projects like Hyperledger or R3’s Corda, ensuring that all code bases “are licensed according to the same terms” allows the platforms to be compatible with what other firms build. Open source also helps standardization to evolve organically—avoiding what Kaminska called the mistake of imposing particular standards prematurely.
Panelists addressed the challenges financial firms, DLT consortia like R3 and other technology providers will face when moving from concept to implementation of new platforms. Peisl advised starting small, building a distributed ledger environment to serve “a mini-market” of perhaps a single asset type and discrete group of investors interested in trading it.
“Once the starting point is in place, you have opportunities for growth from there—to add other assets, invite other investors, all to meet asset servicing solutions,” Peisl said.
A Four-Point Checklist
Peve acknowledged that DLT will not be a solution for every possible use case. She recommended following a four-point checklist: vet the business case to see if DLT can solve a problem/add value to a process; work with regulators throughout the evaluation process, to “understand how [the proposed use] fits into the existing regulatory and legal frameworks”; find the right technology provider; and understand what your path to adoption would look like.
Then there is the matter of security, Kaminska noted. Is cyberhacking more consequential when the target is a distributed ledger? Will interoperability between multiple blockchains magnify the security threat?
Brown laid out two aspects of the problem: data security, which requires multiple layers of protection—including encryption and decoupling from firms’ identities—and ensuring that only valid transactions are processed. For the latter challenge, he said open-source coding can help, by subjecting code to diverse and continual review and correction.
“But it’s a journey. I don’t think any platforms that currently exist would claim to be fully ready for production yet,” Brown conceded.
The security considerations for interoperable blockchains are “not very different” from those for interoperable legacy platforms, Peisl said. But, “there’s so much to say” about security, he acknowledged, and invited forum attendees to join in a side conversation on the topic.