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Five Ways Fintech Will Shape the Global Markets

By Michael Bodson, DTCC President & CEO | September 24, 2019

Five Ways Fintech Will Shape the Global Markets - Mike Bodson, DTCC President and CEO
Mike Bodson, DTCC President and CEO

We know that distributed ledger technology (DLT) has the potential to have a significant impact on the financial services industry, but early work with DLT has demonstrated that future is far from clear. Mike Bodson, DTCC President and CEO, shared his thoughts on DLT and the future of market infrastructure during a recent panel hosted by Northern Trust. Here are five key takeaways from Mike on blockchain technology, its promise and limitations, and how fintech could shape the global markets in the years ahead.

1) The State of DLT in 2019

“The initial hype around blockchain was over the top, which created a tremendous amount of interest in the industry, and our clients wanted to see DLT in action. We’ve been testing it for several years now, and our initiative to re-platform our Trade Information Warehouse using the cloud and DLT has shown us that the hype around fintech is both true and false. We see incredible potential in the technology and are excited by the many opportunities it offers. But we’re also aware that it’s still very early days; there are many challenges, such as the lack of available programmers and insufficient feedback on the user experience, especially when compared to services offered via mainframe computers. On top of that, there are fundamental questions about governance, smart contracts, providing access to the chain, engineering issues and day-to-day oversight that remain unanswered. We’ve seen progress over the past three years, but the technology needs to mature considerably before it will make a significant impact on the financial markets.”

2) Obstacles and Inefficiencies to Be Resolved

“Fragmentation remains one of my biggest concerns. We see inefficiencies being recreated, and fragmentation is increasing because there’s a lack of standardization and interoperability. Everybody is fighting for territory, and every firm that develops a new digital platform wants it to be the platform of the future. As firms rush to embrace new technology, they need to prioritize standardization and other fundamentals that are now commonplace in the global marketplace. If we don’t get these basic building blocks right during these early days, we’ll likely end up with a DLT ecosystem that is as disconnected as the one we have today.”

3) Changes in Market Structure Resulting from Blockchain

“A benefit, and a cost, of moving to distributed ledgers is the fact that firms will be more dependent than ever on communication and interaction within the community. Today, many companies tend to wall themselves off and operate in siloes because their mindset is ‘my system is sacrosanct.’ They want APIs, they want data in a certain way—and they want it immediately. As we move to a distributed world, it’s going to create a dependency and community that’s very different than what we have right now. Firms are going to be reliant on each other for new releases, sharing data and infrastructure, among other things. This is going to require market participants to rethink their relationships with one another and to operate in very different way. The original theory that blockchain would usher in a new, permission-less world is, in my view, a path to chaos. Collaboration, cooperation and partnership will be essential in the future.”

4) Costs and Benefits of Investing in DLT

“DTCC and McKinsey recently completed a study which estimated that revenues in the U.S. equities markets will decrease $17 billion in the next 10 years. We all know the difficulty of today’s economics, and virtually every firm is under pressure to reduce costs further. While DLT offers great promise in this area, in order to gain the benefits, firms will need to make very large, new investments to replace or retrofit their current technology and many are reluctant to do that. Compounding the problem is that the immaturity of the technology and the lack of widespread adoption make it impossible to know the final price tag of transitioning entire systems and processes onto a blockchain. There seems to be a growing consensus, however, that post-trade in the future should be a platform in which a common set of services and communication protocols are provided to its users. It’s really a complete reimagining of the back office. I'm very pleased to see that the technology continues to mature. Digital Asset, where I am a board member, is doing excellent work moving toward separating smart contract programming language from its dependency on a specific platform. This helps to reduce vendor lock-in by using an abstraction layer that makes it easily portable and can be used on multi-party applications. In this way, applications can be built on a traditional database and ported to various DLT platforms with minimal effort. It's an important step because this will help firms harness the power of DLT and smart contracts, while avoiding being trapped on one specific platform.”

5) The Future of Market Structure:

“Market structure and post-trade processing will evolve dramatically in the next 10 years, if not sooner. But the driver of this change isn’t solely DLT. It’s also the cloud, AI, machine learning and the transformative impact of layering these technologies on top of one another. That represents the difference between evolution and revolution. I think we will see a convergence over time of traditional markets and blockchain markets. The underlying principles will remain the same, but there will be a move toward globalization because the expected efficiencies of using DLT will be so much greater. As for DTCC, I couldn’t predict what we will look like a decade from now, but we’re being very proactive in evolving because firms that stand still or that fail to adapt will be quickly displaced. I see the industry right now as straddling the line between the old world and the new world. We’re helping to build a bridge to connect these worlds and shape the future of the industry.”