Sober reality bites on automating the networks of trust on which modern finance
Is the hype around a blockchain for financial markets finally over? The verdict from some of the market’s most active participants at a conference in London yesterday was definitive.
“The breathless coverage last year has been replaced with a more sober examination,” said Michael Bodson, chief executive of DTCC, the US post-trade services group at the DTCC-CSFI event. “We are seeing that when hype meets reality, reality wins. People are much more focused on the ways blockchain will truly be successful now.”
It has turned out that Silicon Valley’s breezy idea of combining its peer-to-peer computing ethos with that of the money management practices of Wall Street is hard to do. Automating the networks of trust on which modern finance sits has proven complicated.
Money has chased ideas. The World Economic Forum estimated that more than 25 countries are investing in blockchain technology, filing more than 2,500 patents and investing $1.3bn.
For some the biggest symbol of this difficulty of turning ideas into reality has been the powerful R3 consortium of 72 of the world’s largest institutions. A recent fundraising has revealed diverging interests among participants. Goldman Sachs, Santander and Morgan Stanley — among the early backers — opted out and R3 scaled back plans to sell 90 per cent of the company to raise $200m. It will now raise $150m by selling 60 per cent, with further tranches of funding to come next year.
Simon Taylor, co-founder and blockchain director of 11FS, said financial technology companies often fill gaps in the market. “It’s all very well to talk a good game about collaboration, but it’s very hard to get it over the line,” he said.
Some have taken comfort in the “Hype Cycle” developed by research firm Gartner a decade ago to describe the trajectory of the average technology. Early executive and investor enthusiasm hits a peak of inflated expectations and is brought crashing to earth. Once through a trough of disillusionment does enlightenment arrive, and the technology becomes useful.
“The hype cycle began when tech firms that had no practical idea about the real world uses of digital ledger technology over-promised and under-delivered. Some promised to make central bank money irrelevant,” said Charley Cooper, managing director of R3. “The financial services firms themselves, through the R3 consortium and other efforts, are playing a key role in helping set reasonable expectations.”
And others say more realistic expectations does not equate to easing off the accelerator. “At some point hype can’t sustain itself, there has to be something underneath it. But there are signs of a tipping point,” noted Blythe Masters, chief executive of Digital Asset Holdings, a blockchain technology company. “There’s a widespread proliferation of consortia doing more than just talk. The substance and intensity of work, the rate of change…a lot has changed. The original vision behind blockchain has evolved.”
R3 will today launch its distributed ledger, known as Corda, for the automation and enforcement of financial contracts.
Others are equally further down the path. This month UK-based Setl announced it had put sterling on the blockchain to enable consumer payments. It also has a qualified regulatory backing. Setl is one of the first slate of companies allowed to test their products in the UK markets regulator’s new “sandbox”, which provides a live environment for testing while still protecting consumers
But some initiatives remain in their infancy. On Monday the German Bundesbank and Deutsche Börse, which conducts most of the country’s securities settlement, said they had developed a prototype to try to settle securities on the blockchain. It may even enact other corporate actions such as coupon payments. But as the two admitted, it “is purely a conceptual study; it is far from being market-ready”.
And while the industry talks about collaboration, others expect established economic incentives to prevail.
“Many will offer open source technology, but you are going to have value capture, you are going to end up with multiple oligopolistic systems, many big players,” said Paul Vine, a partner at lawyer Norton Rose Fulbright.