Distributed Ledgers to Be Mainstream Within a Decade
Blythe Masters, chief executive of fintech provider Digital Asset Holdings, said she is seeing all the things needed to happen now for blockchain and distributed ledger technology to be mainstream in five to 10 years.
Masters spoke at the Disruptive Technologies Forum 2016 in London yesterday hosted by DTCC, the US post-trade market infrastructure, and CSFI, the Centre for the Study of Financial Innovation.
When Masters joined Digital Asset Holdings in March 2015, after 27 years at JP Morgan Chase, she was the third employee of the fintech firm. Digital Asset Holdings has since grown to 84 employees and expected to grow to more than 150 by the end of next year as the firm has been hired by financial institutions as a technology provider.
“In the last eight to twelve months we have seen several things that have constituted a tipping point for distributed ledgers from speculative to real,” said Masters. “We have undergone a sea change from being evangelists to signing contracts with highly regulated systemically important organisations.”
For example, SIX Securities Services, the post-trade infrastructure operator for the Swiss financial sector, and Digital Asset Holdings have announced plans to develop a proof of concept of distributed ledger technology with an initial prototype for securities lifecycle processing. DTCC and Digital Asset Holdings are developing and testing a distributed ledger solution to manage the clearing and settlement of US treasury, agency, and agency mortgage-backed repos. Exchange operator ASX is using Digital Asset Holdings to develop technology for clearing and settling Australian cash equities.
Masters said indications of the tipping point for distributed ledger technology include the widespread consortia developing code, signs of genuine collaboration, $1bn invested predominantly into blockchain from strategic investors – rather than venture capitalists – and the involvement of regulators.
“I am seeing things happening now that are needed for distributed ledger technology to go mainstream in five to 10 years,” Masters added.
She stressed that, unlike the public bitcoin, access to ledgers for wholesale financial institutions will be permissioned and sensitive contractual information will not be shared by everyone on the network. “The blockchain will be used to synchronise activities,” Masters said.
She continued that while there has been an arms race in trading execution technology to extract nanoseconds, post-trade infrastructure has been starved of investment and can be between 20 to 30 years old and written in computer languages that are no longer used.
“The cost of extending this infrastructure is prohibitive in the face of changing requirements,” added Masters. “There is an opportunity to connect different parts of ecosystem and cut costs, trade fails, headcount for processing and capital requirements.”
Masters continued that organisations such as the DTCC have existing pipes, relationships and regulatory approvals and so have an opportunity become the first to offer services using distributed ledger technology.
Michael Bodson, president and chief executive of the DTCC, said at the forum that distributed ledgers create a unique opportunity to re-imagine and modernize the industry’s infrastructure to address long-standing operational challenges but a number of limitations must be overcome before it can be integrated into existing legacy systems.
“For example, if you look at a major innovator like Facebook, they mine and monetize user data to an extent that no one has ever done before, yet they are one of the most admired companies in the world and their market cap is about $340bn,” he added. “Now imagine if a bank did the same thing. The management team would probably be in jail and the stock would be in freefall.”
Bodson said three components are necessary to maximise the use of the technology – separation of development that benefits an individual firm versus where it is in the best interest of the industry; industry-wide collaboration and strong standards and governance.
“Our proof of concepts in repo and credit default swaps are examples of truly collaborative efforts with fintech firms, banks and other key industry participants,” he added.
DTCC has also joined the Hyperledger Project, a consortium led by the independent Linux Foundation, so the technology is open source and not individually owned, and has common standards and governance.
“Governance includes business rules and those may not always be as precise as necessary for computers to execute on human intentions without unintended consequences,” said Bodson. “We must be able to ensure that a fully automated market heading for a cliff has someone to hit the kill switch.”
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