The Finadium 2016 Conference closed with a great panel discussion on the subject of blockchain networks in financial services. The panel featured representatives from leading players: Digital Asset Holdings, itBit and TØ.com (Overstock.com) – all of whom have, or imminently will have, real-life and real-money blockchain trading platforms. Several important topics were covered in a wide ranging conversation.
We look at a central question addressed by our panelists: whether “open ledger” networks are merely a groundbreaking new way for existing markets to operate with greater efficiency; or if these networks will fundamentally change the very nature of the markets themselves. The answer from our panelists is: both.
The developing reality is that the purists – those who imagine a trading and settlement system based on the Bitcoin ideal – are implementing marketplaces in which financial services intermediaries have much more peripheral roles than today. These markets operate on a true peer-to-peer basis in which participants in the transaction require no third party to manage, take part in, or initiate the actual exchange of value.
In the context of T+0 settlement, this is a big deal including the impacts on liquidity and funding. Even the purists recognize that the simple buy and sell settlement is just the tip of the iceberg in terms of the overall complexity of the system. Collateralized funding and securities finance remain key operative functions little changed by the mechanisms of the trading/settlement venue. How we perform these key functions may change, but it seems unlikely – even to the most avid purists – that a financial system can develop in which credit and pre- or post-trade funding intermediaries can truly be eliminated.
The other constituency – those championing the technology itself more than the Bitcoin ideal – is actively creating technical infrastructure in which technology is used to address existing inefficiencies without significantly altering the system itself. This is the world of the technology vendor: they are working closely with banks, brokers and industry utilities to implement technical structures that participants can plug into to perform their existing functions in new and potentially more effective ways. The argument for commercial success is that it is more effective to work non-disruptively within existing institutional domains than to challenge how the overall system functions. Yet, they too acknowledge that there will be some winners and losers in the evolution of the financial services system. Roles will change, and some things that banks, brokers and utilities do will potentially be made redundant.
While one panelist noted that a three legged competition may be developing for banks, CSDs and CCPs, we suspect that the nuances are much more subtle. It may be that CSDs become more like custody banks but custody banks can offer more value added services than today. This will be all be a function of how the open ledger ecosystem develops.
Both camps – the disrupters and the technology infrastructure builders – are converging, and both camps seem to be coming to a common ground where they acknowledge that disruption will occur, but that it will occur with the full (though perhaps not entirely willing) participation of the industry. This is less a bloody revolution than an orderly transfer of power.
More on the Finadium Conference can be found at:
Finadium 2016 Conference roundup and our presentation slides (Premium)
and
The Finadium 2016 Conference agenda
