Tag Archive for: blockchain

Blockchain and Hyperledger Hackfest: from another planet

| 17-10-2016 | Carlo de Meijer |

blockchainLast week I was invited to attend a Hyperledger Hackfest at ABN AMRO in Amsterdam. This event organized by the Hyperledger Fab led by IBM took place in the rooms of the bank’s new Innovation Lab, an ultra-modern environment. Certainly the right place for such a happening. Technical specialists and architects from companies and organisations all over the world from China to Japan and the US as well as Europe were participating.  

From another planet

For me as a ‘normal’ economist who thought to know a lot about blockchain and distributed  ledger technology, trying to bridge the gap between this technology and the financial world, this was sometimes different (and difficult) stuff. Just as if I was on another planet. But for many of them the other way around may also be true. The present financial world is often a complex one for these technical people. To realise that this technology should fit in this financial world they also need to understand what is happening there in other to bridge their gap. That means we should learn from each other in order to get the best of both worlds.

Blockchain platform Iroha

I have learned a lot at this event. But for this blog I like to restrict myself to an interesting offering that is a real example of such a cross-disciplinary research approach: the Japanese blockchain platform Iroha. One of the speakers from the Japanese fintech Soramitsu, was just returning from the Geneva SIBOS event where he had announced the open sourcing  and proposal of a blockchain network called Iroha to the Hyperledger Project (see my earlier blog about Hyperledger Project). Once the proposal is accepted by the Hyperledger Project and its members, Soramitsu will be able to collaborate with a wider range of partners and corporations in testing the network and finding easier methods in deploying blockchain networks to private companies.

What is Iroha?

Iroha, jointly sponsored by leading Japanese technology firms, including NTT DATA Corporation, is a distributed ledger technology and smart contract platform using Java-based smart contracts and a Byzantine Fault Tolerant consensus algorithm, called Sumeragi. This network is adapted from the Hyperledger Fabric architecture, with plans for greater interoperability in the future

Soramitsu intends to increase the availability of smart contract enabled networks to open opportunities for companies in using the blockchain technology. Iroha is expected to provide private businesses, financial institutions and organization with a simple blockchain architecture that is easy to understand, develop, and integrate. That will enable businesses of any size to implement its network with substantially lower costs, as well as run smart contract-based applications with improved security measures.

All of Soremitsu’s partnering institutions and research firms will support the development of Iroha, by running experiments on Iroha’s local currencies and the network’s overall efficiency.

Expected use cases for the Iroha blockchain network include: Payment and Settlement, Contract management, Securities clearing, Development of financial products such as Insurance, Supply Chain Management, Smart Grid, Trade finance, and Internet of Things (IoT), and efficient compliance with Know Your Customers (KYC) regulations.

Soramitsu collaborative approach

Soramitsu, started in February 2016, and a member of the Hyperledger Project, currently oversees various research projects and developments with Japan’s leading research institutions, technology and financial firms.

Weather derivatives

The company’s Iroha project can be implemented outside the realm of finance. Recently, Soramitsu began the development of derivative insurance contracts using blockchain technology, such as weather derivatives, together with the Japanese insurance company Sompo Japan Nipponkoa Holdings.

KYC

In addition, the company is working with Rakuten Securities to develop a Know Your Customer (KYC) using blockchain technology. They are now looking for global KYC partners.

Smart currencies

Soramitsu has also created a new joint research project with The University of Tokyo, The University of Aizu, and the Center for Global Communications (GLOCOM) of the International University of Japan to study the creation of local currencies running on blockchain and distributed ledger technology (Iroha network), so-called ‘smart currency”, and their  effects on regional development. This project will focus on the area around Aizu, in Fukushima Prefecture, Japan.

Thereby the University of Tokyo and its Interfaculty Initiative in Information Studies, Professor Hideyuki Tanaka researched the effects of network economics and information technology (IT). The University of Aizu OpenAppLab and regional technology center looked into the relationships of local smart currencies to solve regional problems. Lastly, GLOCOM, who founded the Blockchain Economics Research Lab back in March 2016, focused its efforts on socio-economic systems and the impact of distributed ledger technology.

Blockchain and cross-disciplinary approach

What may we learn from this? Intensive collaboration between the financial and the technology world is a must. This in order to meet the needs of both worlds. The Hyperledger Project is already a platform where all these disciplines come together. Given its open-source approach this gives the best guarantee to make further progress. It is no up to the regulators to make that a reality!

carlodemeijer

Carlo de Meijer

Economist and researcher

Should SWIFT be afraid of blockchain technology?

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Blockchain and the Hyperledger project: beyond the hype

| 27-09-2016 | Carlo de Meijer |

blockchainWho is not yet convinced of the potential of blockchain? Here is another example that shows blockchain is beyond the hype. Early September, the Hyperledger Project, a collaborative cross-industry effort to advance blockchain technology, announced that 17 new companies and organisations have joined, bringing the total number of members to more than 80. And expectations are that this number will see a further growth, to beyond 100 at the end of 2016.

Let’s have  a look how this collaboration platform performed! But first, what is the Hyperledger Project, and what is their goal?

What is the Hyperledger Project?

As they describe themselves on their website:

“The Hyperledger project is an open source collaborative effort created to advance blockchain technology by addressing important features for a cross-industry open standard for distributed ledgers. It is a global collaboration including leaders in finance, banking, Internet of Things, supply chains, manufacturing and Technology. The Linux Foundation hosts Hyperledger Project as a Collaborative Project under the foundation”.

Goal
Main goal is to build an enterprise grade, open source distributed ledger framework and code base to drive blockchain innovation. This should enable organisations to build and run robust industry-specific applications, platforms and hardware systems to support their individual business transactions. All of these innovations will work with an open-source code and distributed ledger architecture.

Through the creation of a framework that integrates different components for different use cases, the consortium is seeking to bring cohesion to a number of independent blockchain efforts that are in the process of developing protocols and standards. The collaboration should help identify and address important features and currently missing requirements for a cross-industry open standard for distributed ledgers.

Codebases
The Hyperledger Project is made up of different codebases donated to the Linux Foundation, contributed by several of its members including IBM, Digital Asset Holdings, Blockstream, Ripple and others to further the Project goals. IBM alone donated 44.000 lines of codes. In total, there are now 160 code contributors (including individuals that may not be working on behalf of any company). It provides a vehicle for companies to collaborate on features.

Members
The Hyperledger Project has gained a lot of industry support in advancing blockchain technology. Since its formal launch in February this year, with original 30 founding members, this number jumped to 80 in  a half year time.

New Hyperledger members thereby come from all over the world, including Europe, the US and Asia. They have joined a rapidly growing and diverse group across various industries, including finance, banking, trade finance, supply chain management, manufacturing, technology etc.

The Hyperledger Project has backing from many big corporates. Amongst its members there are a large number of established names from technology giants like IBM, Intel, Cisco, Accenture; to financials with names as JP Morgan, BNY Mellon, ANZ Bank, HSC, Wells Fargo; exchanges such as London Stock Exchange, Deutsche Borse, organisations like SWIFT, CLS, DTCC, Digital Asset Holdings, as well as the bank-backed blockchain consortium R3CEV.

Incentives
Why are they all joining the Hyperledger Project?
There are various motivations and reasons why companies are joining this Project. But in general, Hyperledger is seen by many as being “at the cutting edge of blockchain”. Major institutions are increasingly viewing the Hyperledger Project as a venue for further engagement. International collaboration cross-industry, organised effort plus local experience are thereby looked at as key to ensuring the scalability and the adoption of distributed ledger technology.

For them the Hyperledger Project is uniquely positioned to foster the collaborative approach needed in order to advancing the blockchain ecosystem and promoting blockchain’s extensive application to serve as the future credible infrastructure. They hope, by working with this growing community, to further Hyperledger’s vision and open blockchain development efforts. This by sharing ideas, experiences, expertise and knowledge in an effort to bring blockchain’s emerging technology to market

“A key factor of the project’s success will be member expertise and guidance” – Brian Behlendorf

Recent developments

The Hyperledger project has been rapidly moving forward since the start. Next to the announcement of a growing number of organisations joining their collaborative platform, we have seen a number of interesting developments surrounding the Hyperledger Project.

Election Technical Steering Committee
The governance structure has been further strengthened. The Hyperledger Project recently elected a new Technical Steering Committee (TSC) consisting of 11 members. The members include representatives from names like R3CEV (the other blockchain consortium), Digital Asset Holdings, IBM, London Stock Exchange, and DTTC. The composition of this TSC reflects the importance of these players in the Hyperledger Project, from both a technology as well as a business point of view.

Hyperledger Project and SIBOS Innotribe
Hyperledger Project announced it will sponsor the Innotribe Networking event at Sibos 2016, on Wednesday, September 28.  The conference will be held on September 26-29 at PALEXPO in Geneva. As the world’s premier event for financial services, Hyperledger Project is  looking forward to discussing open source distributed ledger technology and its potential to transform the industry with leading companies and experts.

Trade Finance Proof of Concept
The Hyperledger Project as well as the bank-backed blockchain consortium R3CEV announced initiatives to develop blockchain prototypes for trade finance innovation on the same day. Both initiatives were exploring how distributed ledger technology could streamline the existing old-fashioned, paper-based and expensive world of trade finance, using letters of credit. They thereby tried to tackle trade financing challenges via this technology.

Hyperledger Project trade finance proof of concept
The Hyperledger Project trade finance proof of concept comprised HSBC, Bank of America Merrill Lynch and IDA (Singapore). Aim of the various parties was to use a blockchain prototype to streamline global trade. The application mirrors a paper-intensive letter of credit (LC), whereby participants could execute a trade deal automatically through a series of digital smart contracts. They thereby used the open source Hyperledger Project blockchain fabric, thereby supported by IBM Research and IBM Global Business Services.

R3CEV blockchain trade finance initiative
R3CEV and 15 of its blockchain consortium members have “successfully” completed two prototypes using distributed ledger technology for smart contracts. The banks designed and used so-called smart contracts on R3’s Corda distributed ledger platform to process accounts receivable (AR) purchase transactions, invoice financing or factoring, and Letter of Credit (LC) transactions.

The involved member banks in the trials include: Barclays, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natxis, Nordea, Scotiabank, UBS, UniCredit, US Bank and Wells Fargo.

Competition or collaboration?
HSBC, involved in the Hyperledger Project trade finance PoC, but also member of the bank consortium R3CEV, asked if there was no duplication, and if so, expressed the view that “we will all have to come together, because this has to be industry-led”.

According to HSBC “… now we need to get the technical teams together to understand the pros and cons, because part of what we have learned is also the technical limitations of distributed ledgers, in terms of the number of nodes you can have or the quantity of data you can have on it. So now may be the time to share those and see how we can put our heads together to take this to next level.”

“R3 is a member of the Hyperledger initiative and as such we will continue to explore ways to utilise the code being developed by its open source community in the real-world products we are developing with our consortium members”, said HSBC.

Hyperledger hackaton Amsterdam
ABN Amro, IBM, Holland FinTech and Linux Foundation are to run the first-ever Hyperledger hackaton, inviting coders to develop new financial applications capable of running on distributed ledgers. This one-and-a-half day hackaton will take place on 11-12 October in Amsterdam and is open to developers, tech students and fintech companies that are experimenting with blockchain technologies.

Hyperledger Project to address academic lecture ISITC
Leading members of the Hyperledger blockchain Project will address the European branch of ISITC, the International Securities Association for Institutional Trade Communication. The academic lecture to be held at the London Metropolitan University is intended to give the members an idea of what differentiates the Hyperledger Project from other blockchain projects.

This event that will be held in London is the latest effort by ISITC’s newly formed Blockchain DLT Working Group to lay the foundation for a global effort to standardize distributed ledger technology. The DLT Working Group that emerged earlier this year was invited to create a list of 10 blockchain standards for future development. It has changed its task slightly to focus on a cross-industry framework from which a modified list of benchmarks might eventually emerge. The Working Group prioritised working with other standards bodies and consortia like the Hyperledger Project to minimise overlap.

Hyperledger Project “ Blockchain Explorer “
As more companies like Bank of America and HSBC begin to unveil proofs-of-concept (PoC) using the Hyperledger protocol, a more standardised way to search its data is just part of what it will take to scale. Even beyond building out standards, creating common codes may allow organisations to focus on creating industry-specific blockchain applications.

The Hyperledger Project is now building an open-source tool that will let anyone explore the distributed ledger projects being created by its members. Instead of overlapping efforts and of launching competing open source services, unified effort emerged the blockchain explorers being developed by the likes as IBM, Intel and DTCC. The joint project has been named the “Hyperledger Explorer”. Creating common code will allow organizations to focus on creating industry-specific applications that enhance the value of this technology.

This tool would make it easier to learn about Hyperledger from the inside, while still protecting the privacy. When completed, the Hyperledger Explorer is expected to give Hyperledger developers and non-technical users access to block information, transaction data, network information (such as a list of nodes) and chain codes or transaction families. The Board and the recently newly formed Technical Steering Group will be working on these code proposals in the coming period.

Standardisation

The Hyperledger Project thinks it is still too early to strive for a technical standard for a general purpose inter-chain communication protocol (or even data format). Instead, they would like to encourage the different ongoing proposals to converge towards common architectures and or/even common tech stacks or set of reusable modules. This could serve as the starting point for the development of standard APIs, enabling the inter-chain communication and thus start the discussion around the technical realisation of such a protocol. Parts of this common code could also be reused by other projects, thus contributing to a standardisation of the blockchain technology overtime.

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Blockchain, financial regulatory reporting and challenges

| 20-09-2016 | Carlo de Meijer |

blockchainIt is always challenging to look for new topics worth mentioning related to blockchain or distributed ledger technology. One issue that needs special attention is financial regulation reporting under blockchain. In June, the European Securities and Markets Authority (ESMA) published a consultation (or discussion) paper “The Distributed Ledger Technology Applied to Securities Markets”,  about the relevance of using distributed ledger technology (DLT) for the securities markets (see my blog “ESMA and Blockchain: Governance, how to deal with ,…”, June 27).

They thereby raised various questions regarding regulatory reporting activities using this technology. ESMA asked how blockchain would fit within EMIR and reporting. In the meantime,  Deloitte, one of the “Big Four” professional networks in the world, developed a pilot solution for the management of regulatory reporting in a blockchain environment. This looks very promising.

The reporting challenge

One of the main challenges of financial institutions is complying with existing reporting regulations: EMIR in the EU and Dodd Frank in the US. This puts a heavy load on the industry and consumes substantial resources. The reporting infrastructure currently in place is rather complex due to the myriad of regulatory obligations on securities market participants. These requirements are process intensive and are increasingly needing additional innovative technology infrastructures.

EMIR

Under the European Markets Infrastructure Regulation (EMIR), all counterparties involved in trade transactions must ensure that the details of any derivative contract – OTC or exchange traded – are reported to a trade repository no later than the working day following the contract. And that is rather complicated. The main challenges faced by financial institutions reporting their transactions are related to data quality, cost of reporting, timing issues and more importantly, data reconciliation. Regulators are pushing trade repositories to improve the EMIR report data that they collect from reporting firms.

New regulations like MiFIR (Markets in Financial Instruments Regulation) and SFTR (Securities Financing Transactions Regulation), are planned to be enforced in the coming years. These will dramatically increase the scope and the volume of transactions to be reported by financial institutions to the competent authorities on a daily basis. This is the challenge Deloitte is trying to address through its DLT solution, which aims to support current and future regulatory challenges when it comes to OTC transaction reporting.

Dodd Frank

But also on the other side of the Ocean, the derivatives industry is still grappling with the post-trade requirements imposed by the Dodd-Frank Act including swap data reporting. Major banks are struggling to get ongoing regulatory feedback if they are reporting correctly. The Dodd-Frank Act requires all swaps (whether cleared or un-cleared) to be reported to swap data repositories (SDRs). However each of the four registered SDRs, has different system architecture and regulating technology.

Non-consistent regulation

Financial institutions have to report enormous “quantities” of data to different regulators. This creates a lot of headache, as reporting is not necessarily consistent between US and EU regulators. Often times, these reports may have a similar purpose (i.e. identifying customers and counterparties, risk exposures, details of trades) but could have different methodologies behind the calculations. Some of the reports may have different formats or definitions, which can occasionally lead to regulatory arbitrage, fragmentation, and often to confusion.

Distributed ledgers and regulatory reporting: the benefits

Distributed ledger technology has the ability to take away a number of  pain points for both financial institutions and regulators. This technology offers various new opportunities when it comes to trade, post trade and related regulatory reporting.

– The distributed ledger would represent a golden source or “single source of truth” on all financial institutions’ reporting.

– With a distributed ledger, the transaction data will be readily available to the trade repositories and regulators in a unified form and there will no longer be any need for time-consuming reconciliation.

– And thanks to smart contracts the quality and transparency of reported transaction data may further increase and the reporting costs substantially reduced.

Financial institutions

Meeting regulatory reporting requirements would be less of a problem for financial institutions. As the distributed ledger would act as both execution platform and as place to store the record of transactions, it would certainly improve, simplify and add efficiency to regulatory reporting.

As all the information would be on the distributed ledger, organisations could make their regulatory reporting obligations in a more efficient way:

– facilitating the collection, consolidation and sharing of data for reporting, risk management and supervisory purposes,

– while enlarging the scope of information available from a single source

As a result, regulatory reporting could be done automatically and in near real-time.

Regulators

Distributed ledgers could also make access for regulators to this information easier and faster. As all such transactions data and information are directly and electronically available on the distributed ledger, regulators can easily access detailed movements of assets. They could keep track of transactions and positions directly on the ledger. As a result less time-consuming regulatory reporting will be needed

Improvements in regulatory reporting

Blockchain technology could contribute to many improvements in regulatory reporting. This especially is true for reporting reconciliation and validation, while it could lead to unified protocols (in the longer term!)..

Reporting reconciliation

Through blockchain more shared data of reports may be used. As a result so-called unique trade identifiers used by counterparties to a transaction, that don’t have a matching counterpart can be more easily identified and fixed. This would replace the current costly and time-consuming system where each independent trade repository sends submitted reports to each other for reconciliation.

Validation

One of the most basic efficiencies to be gained by using distributed ledgers could be in the area of reporting swap transactions. Validating reports is currently a big issue especially in the US under Dodd-Frank’s derivative reporting. Blockchain could create “a window of transparency” into selected classes of swap positions and exposure. By building a blockchain where participants share validation information that they use to analyse reports, it would be able to more properly identify faulty reports across submitting firms.

Unified protocols

Nowadays many individual trade repositories are used, with multiple variations of message type names. As such, even though the EMIR framework requires certain data fields per trade report, the names and explanations of them can be different based on the trade repository collecting the information. By creating a shared report submission platform using blockchain technology, to be used by participants to input market data and benchmark information, that could force participants to adopt industry-wide definitions for naming and definitions of trade fields.

Multi-jurisdiction

Existing laws protecting data privacy of individuals or corporates restrict data storage beyond national borders. Adopting unified trade protocols, would enable to enlarge an EMIR transaction reporting platform based on blockchain to other regulations. Reports that for instance require ‘mark to market’ valuation, could then use the pricing data information to create their reports across multiple regulation types. Also, trades that are cross-border and need to be reported to multiple regulations could be submitted once and sent for each regulation.

Deloitte Proof of Concept

Deloitte Luxembourg has developed a proof of concept for regulatory transaction reporting in a distributed ledger technology environment. This delivers a far more efficient and lean processing of regulatory reporting using proofs of process and tokenized transaction reports, compared to the present situation.

In this innovative process of transaction reporting, counterparties of the transaction will seal and report their deal using a smart contract, whose terms include all the aspects needed for the transaction reporting. Through smart contracts, transaction reporting becomes even more transparent, reliable, fast and immutable. The regulators will be able to control and monitor the transaction data and their daily updates, which are stored in the distributed ledger. This Deloitte proof of concept will certainly be of great help in assessing the various issues on regulatory reporting raised by ESMA.

The way forward

Notwithstanding the various opportunities’ to be gained from distributed ledger technology for financial regulatory reporting, there are still a number of hurdles and bottlenecks to overcome. Given that this technology is being developed without much (non-consistent) regulatory oversight, it is still unclear how adoption of the distributed ledgers will handle international transactions and data flows.

Some regulatory bodies (such as FCA in the UK) have tacitly encouraged and embraced blockchain technology to help facilitate regulatory reporting. However, issues around a lack of standardisation and the ability of(a number of)  legacy technology systems to handle blockchain will need to be solved before distributed ledger technologies can be properly adopted en masse.

Also setting up a distributed ledger for reporting purposes under Dodd-Frank may prove to be problematic. One of the key mandates of Dodd-Frank is the creation of and reporting of all swap transactions to central databases. Any development of a ledger for reporting purposes must comply with this key statutory fact. Distributed ledgers however are decentralised!

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Blockchain: Playing in the sandbox

| 13-09-2016 | Carlo de Meijer |

blockchainA new – but important – chapter can be added to the blockchain story. The World Federation of Exchanges , the WFE, recently urgently called for the creation of regulatory sandboxes for distributed ledger technology. This should help industry efforts “to explore and understand the impact of blockchain-based services in the capital markets”. The Federation added that regulatory bodies should collaborate with the industry on new developments to minimise unintended consequences.

Regulators enter the stage

This is a very important signal to the regulators that they should take this technology serious and needed to enter the blockchain stage in order the give regulatory clarity. Innovations like blockchain should be primaly industry driven, and “not be unnecessarily impeded by regulatory intervention”, said the WFE. (see also my Blog: “Blockchain and regulation: do not stifle ….”, published 4 April).
Collaboration with the industry will allow regulators to understand the technology, how the future infrastructure will look like and what the impact will be on the financial markets. But above all how they could most effectively perform their regulatory tasks. With the insight and knowledge obtained, regulators will be better placed on the changes necessary to evolve the regulatory environment to not only better regulate these businesses, but also continue to ensure that the legislation does not frustrate this innovation.

Regulatory sandboxes

Regulatory sandboxes have proven to be a useful tool for the wider fintech industry in various jurisdictions. “Promising innovations may be stifled and opportunities missed as firms may be unclear on whether a new product or service complies with legal and regulatory requirements, and consequently may choose not to pursue their new product or service further”.

That is where the ‘regulatory sandbox’ comes in. They have been formed to provide a safe environment for businesses to test their innovative products. These sandbox allow firms to experiment with fintech while providing the appropriate safeguards to contain the consequences of failure for the customers.

New entrants to the financial services market, can use the sandbox to test products, services, business models and delivery without first needing to meet all of the normal regulatory requirements and incurring the considerable costs of putting in place the complex structures and processes to successfully apply for regulatory authorisation.

This should allow appropriate collaboration and exchange of information between industry and regulators.

Regulatory sandboxes: an overview

Since this year these regulatory sandboxes have been extended to distributed ledger technology in a number of countries including UK, Hong Kong, Singapore, Australia and Abu Dhabi. And now also other regulators are thinking about introducing such a testing environment.

  • Regulatory Sandbox Open for Play in the UK

The UK regulator FCA launched a regulatory sandbox early May this year. This is a next step for the FCA, the Financial Conduct Authority as part of Project Innovate, which aims to boost competition and growth in financial services. Goal is to help banks and other financial service providers reduce the time it takes to bring innovative ideas to the market.

The FCA’s sandbox will allow business to test disruptive technologies including distributed ledgers in a live environment “without immediately incurring all of the normal regulatory consequences”. The FCA however said that consumer protection will be a significant focus, and will be considering appropriate consumer safeguards.

Application

Fin-techs could apply to the UK’s regulatory sandbox from 9 May till 8 July. The second ‘cohort’ will have an application deadline of mid-January 2017.this year

The FCA uses an inclusive approach to defining potential users. That means anyone from a start-up to a multinational can benefit from the sandbox. For authorised users and suppliers, the FCA has identified  three key tools to businesses on a case-by-case basis (individual guidance; waivers; and, no enforcement letters). Unauthorised business will use the sandbox predominantly to facilitate testing without the need for full authorisation from the FCA.

Accessing the FCA sandbox is however not straightforward. A firm must meet a number of key eligibility criteria including: be in an in-scope business; demonstrate a genuine innovation; deliver a consumer benefit; demonstrate a need for the sandbox; and, be ready for testing. It should also be noted that the sandbox will not be available for activities which fall outside of the Financial Services and Markets Act 2000. For example, payment service providers and e-money issuers already potentially benefit from the lighter touch regimes in the PSRs and the Electronic Money Regulations.

  • Hong Kong Monetary Authority (HKMA) plans to create a regulatory sandbox

HKMA last week announced plans to create a regulatory sandbox, where start-ups and banks can test solutions and express their ideas before applying for authorisation. The sandbox allows banks to conduct tastings and trials of newly developed technology such as blockchain on a pilot basis. Within the sandbox, banks can try out their new fintech products without the need to achieve full compliance with the HKMA’s usual supervisory requirements.
In a related initiative, the HKMA has set up a ‘fintech facilitation office’ with its own dedicated e-mail account to act as a platform for the exchange of ideas between the regulatory body and banks and tech firms. Industry players, such as banks, payment service providers, fintech start-ups, the HKMA, etc. can get together at this facility to brainstorm innovative ideas, try out and evaluate new fintech solutions, conduct proof-of-concept trials, and gain an early understanding of the general applicability of creative solutions for banking and payment services.

  • ASIC released consultation paper on regulatory sandbox

Also Australia plans a regulatory sandbox for fin-techs technology innovations including blockchain. The Australian Securities and Investments Commission (ASIC) released a consultation paper on this issue, detailing proposals for a testing ground for innovative robo-advice providers and other similar services.  It also highlighted ASIC’s views about some regulatory options already open to fin-techs under the current law.

The sandbox will allow new entrants to test a service for up to 100 retail clients for up to 6 months without holding an AFSL. The service can only relate to advice and “arranging” for dealing, catering primarily to robo-advisers.  Product issuers such as payment facility providers and marketplace lenders are excluded, as is advice about general and life insurance. Start-ups will not need to apply to ASIC to be admitted to the sandbox (unlike comparable sandbox arrangements in other jurisdictions), but may need to be vetted by a “sponsor”, such as a hub, co-working space or venture capital firm.

A final regulatory position is expected by December.

  • MAS proposes regulatory sandbox for fintech

Early June, the Monetary Authority of Singapore (MAS) released a consultation paper detailing guidelines for a ‘regulatory sandbox’. With this sandbox approach the MAS hopes to encourage and help firms experiment with innovative solutions to support their development, and bring fintech solutions to the mainstream.

Any interested firm can adopt a sandbox to experiment within a well-defined space and duration; the MAS will provide the appropriate regulatory support and will relax certain legal and regulatory requirements. This sandbox will however have to meet certain evaluation criteria (technologically innovative; benefit consumers and address a significant problem or issue; intention and ability to deploy the solution in Singapore on a larger scale; report to the MAS on the test progress; major foreseeable risks have to be assessed and mitigated; etc.).

In April, the country expressed its desire to become the leading hub in Asia for blockchain-technology and fin-tech start-ups. MAS aims to provide a responsive and forward-looking regulatory approach that will enable promising fin-tech solutions to develop and flourish. The sandbox will help reduce regulatory friction and provide a safer environment for fin-tech experiments.

  • Abu Dhabi FSRA seek blockchain start-ups for fintech sandbox

The Financial Services Regulatory Authority (FSRA), the independent regulatory authority of Abu Dhabi’s newest financial free zone, has released a consultation paper in which it detailed its plans to create a sandbox environment for fin-tech under which start-ups would be allowed to work under a flexible regulatory framework for up to two years. The FSRA is seeking to promote the development of blockchain start-ups as part of a drive to create new efficiencies in the regional financial sector.

The FSRA’s proposal would seek to limit start-ups accepted into the program to those that “promote significant growth, efficiency or competition in the financial sector”. To give some clarity where they are focusing on the paper goes on to cite examples of technologies that fit this description.

“The advent of robo-advisers that offer lower costs, simplicity and real-time portfolio analytics and monitoring; or leveraging on the application of blockchain technology and distributed databases to facilitate price discovery, smart contracts, settlement of financial transactions, etc that may lead to safer [and] better products, and higher productivity and growth.”

Benefits for startups

The benefits of these regulatory sandbox are manifold. Both start-ups, the whole industry and regulators may profit.

There ought to be clear benefits :

  • First of all from a time and cost point of view.

Most immediately, the ability of businesses to safely test their products and also be engaged in direct dialogue with the regulator without first having to expend time and money on a speculative application for regulatory authorisation should relieve start-ups of high costs they often cannot afford.

  • From a compliance point if view

At the same time, the businesses can adapt their offerings to better ensure regulatory compliance.

  • From an investor point of view

Once through the process, and assuming the road-testing has produced a successful outcome for the business, the task of attracting investors should be simpler as a major unknown will have been removed.

  • From a financial industry point of view

The regulatory sandbox may help to foster innovation in financial services and that is good for the whole industry and their customers.

  • From a regulatory point of view

With the insight and knowledge obtained from that role, the regulator will be better placed to assess the changes necessary to evolve the regulatory environment to not only better regulate these businesses, but also continue to ensure that the legislation does not frustrate the competition that the FCA wishes to promote.

Global regulatory collaboration

Given its global reach, the level of complexity and the interconnectedness of financial markets, and the level of complexity and the interconnectedness of financial markets, regulatory bodies worldwide should collaborate to ensure that no different regulatory environments are created and regulatory arbitrage is excluded. National and foreign regulators must coordinate to create a common principles-based approach for blockchain oversight A special role should be given to bodies like the IOSCO and the G-20 Financial Stability Board.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Blockchain: Some remarkable announcements part II

| 05-09-2016 | Carlo de Meijer |

blockchainWhile Blockchain is seen by many as a network phenomenon that needs large market participation, collaboration and interoperability to succeed, both R3CEV and a group of four large global banks came with announcements that are at least a bit remarkable. The bank-backed consortium had filed for a patent of Corda (which is contradictory to the need for open standards and protocols), and at the same time a small group of R3 consortium members have expressed their wish to create their own digital currency (while large collaboration is needed). 

Utility Settlement Coin

A second remarkable announcement was that of a number of large global banks to create their own digital currency. This plan could be seen as another example of  going alone, or at least with just a limited number of players, while large scale collaboration is required for more massive adoption of this technology.

Separately, a group of four R3 consortium members, including BNY Mellon, Deutsche Bank, Icap and Santander have joined with UBS and Clearmatics to a blockchain based transaction settlement project called the Utility Settlement Coin (USC), and plan tests in  a real-world environment.

What is USC?

USC is an asset backed digital cash instrument implemented on distributed ledger technology. The USC is focused on facilitating a new model for digital central bank cash. (By the way, there are several digital cash models being explored). USC is aimed at facilitating payments and settlement for use within global institutional financial markets. Using this technology could contribute to more efficient transactions in terms of speed and lower costs.

USC is aimed as a service of cash assets, with a version for each of the major currencies and USC is convertible at par with a bank deposit in the correspondent currency. USC is fulltime backed by current assets held at a central bank. Sending a USC will be sending its paired real world currency.

Going forward

The group will collectively build of on earlier experiments by UBS and blockchain software company Clearmatics. They launched the concept in September 2015 to validate the potential benefits of USC for capital efficiency, settlement and systemic risk reduction and as a forerunner for central bank backed digital cash issuance. The virtual coin will act as a proxy for physical currency assets held in deposit at the central bank.

“The focus of the work will consist of financial structuring of the USC and wider market structure implications, as well as market integration points for a fully operational utility settlement coin for future use by institutions” according to the group.

The USC concept will be developed through a series of short repetitive phases and platform developments. At each stage the aim is to increase the number of market participants, broadening engagement, connectivity and network effects.  That virtual currency, USC, should go live in 2018.

Active dialogue

Active dialogue  with central banks and regulators will continue to ensure  a regulation compliant, robust and efficient structure within which the USC can be deployed. Recent discussion of digital currencies by central banks and regulators has confirmed their potential significance.

Read more remarkable Blockchain announcements in the first part of this article.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Blockchain: Some remarkable announcements part I

| 29-08-2016 | Carlo de Meijer |

blockchainWhile Blockchain is seen by many as a network phenomenon that needs large market participation, collaboration and interoperability to succeed, both R3CEV and a group of four large global banks came with announcements that are at least a bit remarkable. The bank-backed consortium had filed for a patent of Corda (which is contradictory to the need for open standards and protocols), and at the same time a small group of R3 consortium members have expressed their wish to create their own digital currency (while large collaboration is needed).

R3 and Corda patent

R3CEV, the bank-backed consortium this week announced that it had filed for a patent of Corda, the distributed ledger software that underlies its new project ‘Concord’.

Some critics have argued that blockchain-based solutions should not have patents attached. That could not only hinder innovation in the field of distributed ledgers technology over the coming years. But it could also stand in the way of a more massive adoption of this technology.

R3, however sees it different and says that “although Concord will resemble other platforms working on blockchain technology the underlying software Corda has/offers  enough unique features to justify a patent”. “Corda is just one element of the wider Condor platform”.

Corda White Paper

In the meantime R3 also released its first Whitepaper on Corda. It gives an introductory, non-technical overview that explain its vision, some design choices and outlines the key concepts underpinning the Condor platform.

The Corda project that was announced in April this year, aims to create the software that would be central to its wider blockchain-inspired  shared ledger development project, called Condor.

In this Whitepaper it is explained how R3 set themselves the challenge of starting with the various pain points in the financial industry’s: duplicated, inconsistent data and business logic and redundant business processes – and asked themselves “if they could apply breakthroughs in distributed ledger and blockchain technology to solve them”.

Corda is in fact the outcome of the analysis R3 and the participating banks made on how to achieve as many of the benefits of distributed ledger and blockchain technology as possible “but in a way that is sympathic to and addresses the needs of regulated financial institutions”.

What is Concord?

Concord is aimed to become a distributed ledger platform that has been in development for over a year now. Thereby various challenges are assessed such as governance, internal record keeping and regulatory reporting across the financial services marketplace.

R3 describes Concord as a ‘shared-services model’ that still maintains privacy for banks. Concord aims to become a universal software platform connecting bank operations, allowing companies to run high-scale financial applications on permissioned networks across organisations and internally.

This platform that will be designed to record and manage important, financial agreements (read: smart contracts) between regulated financial institutions, aims to digitalise so-called back and mid-office functions, including trade clearing and settling securities trades, asset registry, reconciliation, and even the recording of cash balances.

By moving these middle and back office functions to a secure cloud-based ledger, R3 en its members hope that Concord will significantly streamline present cumbersome operations, and lower the costs of maintain them. By doing that huge cost savings could be realised (billions of dollars).

Traject

A version of Concord is expected to be launched in the next several months. A small number of member banks will begin testing the system early 2017, with an so-called “alpha” version planned to appear by the middle of next year. “We need to make this real to business users in 2017”, according to R3.

It however will be up to consortium members to decide whether to use it or not. Current bank members of the consortium haven’t (yet) committed to using the new Concord platform and aren’t bound to use it. Nevertheless they have invested money and resources helping build it and also have input into Concord’s specifications.

Concord versus Ethereum

Concord resembles Ethereum, another distributed ledger platform, in a number of ways. Just like Ethereum Concord is viewed as a platform that will allow developers to build any variety of applications. But Concord is tailored expressly for financial institutions, and so has different features and functions.

Perhaps the most important difference between Concord and Ethereum is the way transactions will be recorded. With Ethereum every transactions is recorded, verified and disclosed immediately in their respective public, distributed ledgers.

With Concord, while the transaction is verified via a distributed ledger, it is not publicly disclosed, maintaining the confidentiality that was a key concern of R3’s member banks. The details are shared only by the parties involved, or parties to whom they give access.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher