From left to right: Donald Donahue, Lee Braine, Robert Palatnick, David Rutter and Fabian Vandenreydt
Few in the investment industry would deny that blockchain and distributed ledger technology (DLT) offer a world of opportunity to retool the financial industry’s post-trade process.
As with any new technology, however, blockchain’s promise to recreate post-trade processing can be overstated by some, particularly by those looking for the next great technology.
That was the focus of a panel at the DTCC 2016 Blockchain Symposium, “Separating Hype from Reality: Seeking Answers to the Big Questions about Blockchain.” The panel set the stage for discussion on what’s hype and what’s real for this emerging technology.
Donald Donahue, President and CEO of Miranda Partners and former President and CEO of DTCC, questioned whether some of the basic characteristics of blockchain could work as a long-term solution in financial services. In particular, he questioned whether a decentralized, “fully trustless” system like blockchain makes sense.
He pointed to the financial crisis and how important it was to have central management, like with DTCC, during times of market stress. “When the pressures of the 2008 financial crisis repeat themselves… a processing infrastructure that operates completely on automatic without a central managing hand would drive the financial system straight off the cliff,” Donahue said.
An effective strategy to implement blockchain should “preserve a central managing hand,” Donahue said, and any plan that doesn’t have that feature and relies strictly on the technology alone “is completely smoke.” He does, however, see promise with blockchain as a global tool, allowing Central Securities Depositories (CSD) to operate on a permissioned ledger. This would integrate and unify global clearing and settlement, he said. A permissioned ledger would restrict who can join the ledger and require participants to adhere to the same set of standards and rules.
Panelists Say …
Lee Braine, Investment Bank CTO Office, Barclays, pointed out that his firm has been exploring business applications for the past 18 months and has been involved with financial technology companies in this area. He said that, while the technology is “exceptionally complicated,” it does have the promise to offer solutions for a large number of use cases. Braine acknowledged that this has led to some hype, but he has been encouraged by progress on the technology front in a short period of time. This past year was one of identifying challenges, he said, and 2016 will be spent “looking for the solutions to come back and meet more of our requirements.”
Robert Palatnick, Managing Director, Chief Technology Officer, DTCC, said that blockchain’s “ability to share information and let information flow is powerful.” If market participants can look at data the same way with business rules and data information embedded in a new technology, “how powerful would that be?” The process of rolling out technology and upgrades would be so much simpler with blockchain, he added.
- Donald Donahue, President and CEO of Miranda Partners (moderator)
- Lee Braine, Investment Bank CTO Office, Barclays
- Robert Palatnick, Managing Director, Chief Technology Officer, DTCC;
- David Rutter, CEO, R3
- Fabian Vandenreydt, Global Head of Securities, Innotribe and the SWIFT Institute
Palatnick praised blockchain’s security, resiliency and integrity as a system. He then clarified several areas about blockchain, some of which he characterized as being “hyped,” including:
- Reconciliation: it will not go away
- T+0: current technology could get the industry there, and sometimes information sharing is more important than real-time settlement
- The ledger provides all the computing solutions a company needs.
- “What sometimes gets lost in the conversation is that this technology is just a ledger of transaction,” Palatnick said.
David Rutter is CEO of R3, a blockchain technology company that is comprised of Wall Street firms and investment banks. He said the technology is evolving quickly. Long term, he believes the technology will work, describing how “smart contracts,” or self-executing contracts, would work in a peer-to-peer, decentralized network of ledgers, or data bases, in a cloud environment.
“I think there’s been enough work and experimentation done,” Rutter said, “that we can really change the way transactions are processed for financial institutions.”
He further explained that there is less hype surrounding blockchain today than a few years ago, when he visited Silicon Valley. Still, he noted that blockchain is understandably subject to hype within the financial industry because of the tremendous cost pressures it faces.
“There is a lot of hype, but the evidence points to a tremendous amount of potential,” Rutter said. “We’re a bunch of smart people and we can build some really unique solutions that can make our business a lot more efficient going forward.”
Fabian Vandenreydt, Global Head of Securities, Innotribe and the SWIFT Institute, said that the entire industry will not start out on a blockchain the first day, nor will the entire “end-to-end” post-trade process be on a blockchain at the start. Firms like SWIFT and DTCC will need to play an important role, using both technologies – the legacy systems and the new blockchain – until all clients are fully on board using the new technology, he said.
The Legacy and The New
“It is very important to have networks with nodes that can process both the distributed ledger environment and the legacy environment, and to have smooth APIs (application program interfaces) between both,” Vandenreydt said.
He was not of the opinion that blockchain’s potential has been hyped, but he did point out that there are “various levels of maturity” for different use cases for the new technology, adding that smart contracts are new and untested but they are still “great technology.”
For adoption of the technology, four things need to happen, according to Vandenreydt:
- The Industry needs to collaborate
- Data needs to be standardized, from end to end, including legacy systems
- Integration, making sure systems can speak to each other and are “API towards legacy systems”
- Trust the business model and governance.
Sweet Spot for Blockchain
Panelists were asked to predict when blockchain would be “ready for primetime?” Braine suggested “several years’ for a securities settlement-type function because there needs to be a “sufficient quorum of participants,” or critical mass. Other less complicated applications would be 18 months or so, he added.
Rutter said that there are “some easy wins,” and pointed to reference data issues that could have a solution within 15 months. He reiterated the need for community standards and adoption to move forward. He expects to see progress continue this year and in the future.
“In three to five years, we’ll have some measure of success that we can point to,” Rutter said. “Five to ten years, is kind of the sweet spot.”