Two years ago, there was talk of a blockchain revolution in the post trade space, but in fact, there was little evidence of success in this area or capital markets in general. There were “proofs of concept”, small start-ups but not the big bang type of breakthrough that had been signalled.
Confusion also reigned over the differences between blockchain, bitcoin and cryptocurrencies. They were often seen as interchangeable and not as distinct separate components of the same ecosystem. For example, there are more than 4,000 cryptocurrencies in existence as of January 2021 although it is easy to think bitcoin is the only one. It dominates the headlines along to a lesser extent with ripple, litecoin and ethereum due to their gyrating prices which have kept investors on edge.
Today, there is greater understanding about the nuances, characteristics and potential of the technology. Industry participants are more realistic regarding the potential and that the development of blockchain will be much more of an evolutionary process, employed to address specific business problems. Short-term, the focus is much more on incremental changes, cost reductions, greater automation and modest improvements of post trade infrastructure rather than the complete overhaul of post trade architecture.
Small, nimble, highly technically capable or larger firms are much more likely to succeed in this role, if they target a real problem in a relatively contained area. Take Baton Systems’ distributed ledger technology (DLT) solution which HSBC leveraged to help settle over $250bn of internal FX transactions driving significant balance sheet and operational efficiencies.
There are two key challenges to changing post trade architecture. One is internal and that is not much different than any other massive transformation project. These are not one year but multiyear projects. The other is external meaning that real change does not just happen in isolation. To make a meaningful difference, market infrastructure also needs to change outwardly but that also exposes firms to interoperability issues between different systems and processes. The biggest hurdle to overcome in making progress is the degree of collaboration that is de facto required to introduce change across participants and providers. Project experts, funding and planning need to be co-ordinated across all these organisations.
Although challenging these are not insurmountable issues. Companies should first undergo a wholesale review and reengineering of their post trade processes to better identify the inefficient processes and where automation can be applied to the maximum advantage.
Start-ups tend to struggle more in terms of raising funds and in convincing market participants to join a new network or venture. Larger organisations who already have existing ties are more likely to be successful in these broader initiatives. They have relationships and influence across many people around the table so can collaborate, coordinate and drive bigger infrastructural changes across market infrastructure and participants.
As an indicator of what can be achieved at scale, all eyes are on Fnality International’s Utility Settlement Coin project which has 15 leading banks as participants. The aim is to create digital versions of five major fiat currencies, but the project has been delayed until at least 2021 as it seeks regulatory approvals.
However, the fact that regulators have engaged with the project is a sign that the industry is ready to move forward and seriously consider the best usage of the technology to tackle the inherent inefficiencies in the financial universe.
Predictions from the webinar panel for the next two years were much more optimistic than at a similar event two years ago.
You can watch the full webinar recording here