Blockchain in Capital Markets: Emerging Use Cases II
Izabella Kaminska at FTAlphaville, has done an excellent job of putting the current blockchain project-users cases in perspective. She emphasizes that there is
too much versioning and regressing from fundamentals; essentially heading towards a different but centralized system.
She also mentions that all this versioning is introducing lots of new risks. Is there a suspicion floating around of a “conspiracy” that would experiment with new and different user cases, reducing costs but needing a different type of human intervention? And, then when implemented, the human requirement for administering the system, could lead to failure? Of course, Izabella offers a solution to such a scenario:
The administrators of the new-different system could only be some sort of priests/monks/knights; humans of higher spiritual caliber so that they LACK the desire for wealth and power.
In any case, we are at the very early stages of user cases whether lacking scale or the openness, and such considerations are only intellectual predicaments. Better watch than talk! At the same time, read “The Priests, the Temples and the Blockchain Clearing Systems” and “Decentralized courts and Blockchains”.
Today we will concentrate on using blockchain technology in the area of Smart contracts and post trade processes (not covered in Blockchain in Capital markets: Emerging use cases I)
Symbiont has trademarked the Smart Contract term, but the term has taken a life of its own, muck like “Jeep”.
First quarter of 2016 and the State of Delaware is working on using blockchain technology for autonomous record keeping at first and then for compliance and fraud detection. Their experimentation will start in partnership with Symbiont. Delaware is the legal home of 66% of Fortune 500 companies, 85% of U.S. initial public offerings, and many startup and venture capital backed businesses around the world. They aspire also to attract blockchain startups and become the CryptoValley of the US. The announcements were made at the Consensus 2016, blockchain summit the beginning of this month (2nd one).
The two other most visible experiments underway are those run in partnership with Digital Assets Holdings and the most recent press releases on blockchain startup Chain.com.
Digital Assets Holdings, has the first mover advantage, after winning the partnership with ASX. The Australian stock exchange seems to be the closest to an ideal blockchain experimentation environment in wholesale financial markets. The reasons are multiple, but the two main factors are that the Australian market is the only significant market that is fully dematerialized (i.e. no physical certificates) and the exchange owns a large part of the value chain associated with the trade processes. The focus of the DAH and ASX proof of concept is focusing on Sweeping, Clearing and Settling.
Chain and Nasdaq, have been testing issuance and settlement for private securities. Proof of concept announcements were made Dec 30, 2015. Recently, Chain announced a new open source protocol, called the Open Assets which the most popular and well-supported ‘colored coins’ protocol today, for building a blockchain network that can securely, privately and rapidly handle a large volume of transactions. Nasdaq is one that has being experimenting with it and collaborated with chain in the design of this protocol as part of Nasdaq’s zero-day settlement platform (T+0) to trade private stocks on.
Blockchain use cases for smart contracts
Smart contracts is software that can execute the terms of the contract. Sounds simple but isn’t easy. The two main reasons are that financial contracts are complex with natural language defined contingent clauses that are difficult to interpret and code; and netting of transactions is also more complex that first imagined.
The simplest applications would for swaps governed by ISDA agreements, credit defaults swaps and then of course, major efficiencies could be gained for syndicated loans, P2P loans, escrow accounts, and OTC derivatives.
Another high profile project is Corda, a work in progress ledger platform being built by consortium R3CEV. At the end of April, Barlcays published an actual contract template for Swaps and is aiming that ISDA will collaborate with them towards an industry wide adaptation.
ConsenSys, a DAPP production studio, has designed an Etherum Apps on which one can create and trace a Total Return swap agreement. Total return swaps (TR) are contracts that one counterparty makes payments to another based on the return of a reference asset. The ConsensYs app sits on Microsoft Azure platform, the Ethereum Total return Swap (eTRS) will allow clients to create swap agreements as well as monitor the risk valuations, funding and pricing of the swap in real time.
ConsenSys also announced a smart-contract based crowdfunding platform, the Weifund on which one can raise capital without the headache of share issuance, management and ownership. Weifund focuses on Decentralized crowdfunding, built with under 150 lines of smart contract code using Ethereum and Consesys Dapps. Then trade share on EtherEx decentralized exchange.
In the Credit default swaps area, Axoni is a first mover with an April announcement of a successful use case of smart contracts used to manage the post trade process of a standard US single name credit default swap. CDS’s is a simple example of the language complexities inherent in many OTC contracts (amendments, novations, etc). The DTCC is involved in this group, along with BoFa, Citi, Credit Suisse, JP Morgan and Markit.
Late April, we saw an FX swap use case of blockchain announced by Clearmatics, focused on building decentralized networks (DCN) and OpenGamma, a risk mgt firm. The demo built on Ethereum was presented at the Quantech conference in London.
Fresh off the press, just last week, Ipreo and Symbiont announced a partnership focused in the $3 trillion global syndicated loans market. In a market that typical settlement periods are 20 business days, both sell-side and buy-side can gain efficiencies (cost and counterparty risk) through a fully automated settlement process with slashed settlement times.
Also Mizuho bank announced experimentation of the post trade process of syndicated loans with blockchain startup Currency Port
In the area of Voting rights on securities without being physically present (currently, less than 1% participation in general meetings) NASDAQ and the Estonian stock exchange in Tallinn made an announcement in February of using blockchain to test it use for private securities voting rights.
The Hyperledger project just came out of the woods with an announcement (at least publicly there isn’t yet a use case) about Juno a “distributed cryptoledger” that has its own smart contract language called ‘Hopper’.
Wrap up:
This March we wrote about 3 blockchain use cases in the settlements area: ASX, Nasdaq, and T0 platform. There aren’t any meaningful updates since Real Time Equities Settlement – three Blockchain projects. There isn’t a market consensus as to what is optimal in terms of settlement time (reducing time settlement to same day, to every 3-4 hours or to real time? And what about short selling and covering as a liquidity provider?) or frequency of netting. Ironically, the technology for higher frequency sweeping, netting, and settling exists. Blockchain versioning may actually not be the only the way to tackle the variety global inefficiencies.
As the market is nascent and is exploring, lets watch!
Japan is coming to the table; BNP Paribas seems to have kept a low profile but is involved in many different ways (check out BNP Paribas on Coindesk); States with business interests are stepping in, like Delaware; ASX has taken the lead and despite the recent departure of the CEO (godfather of the project) has the structural advatnatage. NASDAQ is undoubtedly a Fintech with a Femetech leader as President and COO, Adena Friedman. Blythe Masters of DAH is the woman promising to reshape the exchange market. We are awaiting this summer (June-August) the decision from Australia as to whether they will replace CHESS with the technology being developed by ASX/DAH.
Private securities remain the test ground; equities the testing asset class for this. The broader use cases are in other asset classes: Swaps and Loans mainly and derivatives.
The areas of interest are basically in post-trade processes.
Smart contract templates & smart contract languages, are being developed. More versioning and consortiums are emerging. Hurdles are surmounting and there is lots to talk about: from why blockchain startups aren’t funded by VCs but mainly by the Street; to who is more threatened in the value chain (custodians or software vendors); to how really disruptive is the technology in the labs of the incumbent consortiums.
Yes, the market is nascent and exploring and we are watching (others with disbelief and others not). The reality is that already the blockchain landscape has changed. Last year the space was dominated by blockchain protocols (like, bitcoin, Ethereum, Ripple) and bitcoin API companies (Chain, Gem, Coinbase, Coinkite). Now, the landscape is very different. William Mougayar, author of the upcoming book, The Business Blockchain gives a clear up to date landscape breakdown on Implementing Blockchain: Who Are You Going to Call?
Daily Fintech blockchain thematic update is focused on use cases in the five Fintech segments that we analyze. Join the conversation in the commentary below.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.
