Blockchain Adoption Still in Question
Deutsche Bundesbank said the widespread use of blockchain in financial markets is not a certainty as the German central bank still has many questions about distributed ledger technology.
Dirk Schrade, Department of Payments and Settlement Systems at Deutsche Bundesbank, spoke on a panel about new technology in financial markets at the Swift Business Forum in London yesterday. A poll at the conference found that 50% said new technology will change how firms do business and that their own firms have invested financial and strategic resources in fintech projects.
Schrade said fintech is one of the most important topics for the German regulator and its top priorities are cyber security, integrating markets in the Eurozone and digitalization. The Bundesbank launched a pilot last year with exchange operator Deutsche Börse for a blockchain-based securities settlement platform.
“DLT is still in proof of concept and the certainty of widespread use is not a reality,” Schrade continued. “You have to compare DLT to current solutions that are available in terms of speed and cost.”
Schrade added that the European Central Bank is reviewing the technology for running TARGET2, the real-time gross settlement system for the Eurozone, and it is unlikely that DLT will be selected within the 2020 timeframe. He pointed out that TARGET2-Securities (T2S), the platform which aims to harmonize cross-border securities settlements in the Eurozone, has taken 10 years to implement.
Gavin Wells, head of Europe at fintech provider Digital Asset Holdings, said on the panel that the readiness to adopt blockchain has increased as the hype has decreased.
Wells said: “Fintech can enable change but needs to fit in with the way the market operates, enable real use cases, work within existing regulations and with financial market infrastructure to achieve a network affect.”
Digital Asset Holdings is develop blockchain technology for clearing and settling Australian cash equities for ASX and Wells said the Australian exchange operator will make a decision on its use by the end of this year.
DTCC, the US post-trade market infrastructure, and Digital Asset are also developing and testing a distributed ledger solution for clearing and settlement of the $3 trillion-per-day US treasury, agency, and agency mortgage-backed repo market as real-time settlement will reduce the capital required for netting. In February DTCC and Digital Asset said they had successfully completed a proof of concept and are forming a stakeholder working group of active market participants. The next phase is due to be completed by June 2017 when the DTCC will determine whether to move forward with development.
Wells added: “New technology is open source, standardized and collaborative which reduces fear and gives comfort to regulators.”
Mark Carney, governor of the Bank of England, spoke at the International Fintech Conference in London this month and said the UK central bank’s new approach to regulation means it can help build the right infrastructure for fintech to realise its promise.
Carney said: “Fintech will democratize financial services. Banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience. And tantalisingly, fintech could help make the system itself more resilient with greater diversity, redundancy and depth.”
Four new ‘mobile’ banks have been authorised in the UK and the Bank of England also established a fintech accelerator last year.
“Since then, we have worked with a number of firms on proofs of concept ranging from strengthening our cyber security to using artificial intelligence for regulatory data, and improving our understanding of distributed ledgers,” added Carney. “We are looking to work on new proofs of concept on maintaining privacy in a distributed ledger and applying a range of big data tools to support the Bank’s analysis.”
The Bank of England is also working to develop the financial system’s hard infrastructure to allow innovation, such as giving new access to payment systems. At the the same time the Bank needs to maintain the resilience of RTGS, the UK payment system which processes half a trillion pounds on a daily basis. “Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s ‘plumbing’,” he added.
The Bank of England will issue a new blueprint for RTGS in early May.
Carney continued that securities settlement seems particularly ripe for innovation and DLT could yield significant gains in accuracy, efficiency and security, saving tens of billions of pounds of bank capital and significantly improving resilience.
“To help distinguish distributed ledger’s potential from its hype, we have completed our own proof of concept,” he added. “We are a member of Hyperledger along with private market participants and tech firms and we will make our next generation RTGS compatible with settlement in a distributed ledger.”
However, he pointed out that settlement times could also be cut using existing technologies if market participants change their collective practices and use fewer intermediaries.
“The challenge for policymakers is to ensure that fintech develops in a way that maximizes the opportunities and minimizes the risks for society,” said Carney. “The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions.”
The European Commission is also going to implement a pilot project to build fintech expertise and regulatory capacity to help understand the role European public authorities should play to encourage development and formulate public policy.
Industries leading this year’s D&I Index Top 100 are banking, investment services & insurance.
Members are evaluating payment-versus-payment for currencies not yet eligible for CLSSettlement.
Jefferies and three fund managers will provide CLO equity capital and warehouse funding for new issues.
HSBC Asset Management has invested in the new women-owned fund manager.
Over the past decade the UK has declined against international competitors.