Tag Archive for: blockchain

Blockchain: what happened during my stay in South Africa? (Part I)

| 28-12-2016 | Carlo de Meijer |

chains-ii In the past three weeks I travelled throughout South Africa. My main focus was on the country, the people, the safaris, the Big Five and not on blockchain! Now being back home I was curious to learn if there were developments in the blockchain area. 

A number of interesting reports were launched, amongst others by Euroclear and Deloitte. And there has been growing blockchain and distributed ledger activity in the financial industry from start-ups, to banks, central banks, the market infrastructure and consortia. But also from advisory companies, central government bodies and others.

In this first article I will focus on two reports and on startups.

 REPORTS

  1. Euroclear Report: Blockchain Settlement – Regulation, Innovation, and Application 

A new report by Euroclear has looked at the regulatory and legal aspects of the use of blockchain technology in post-trade settlement in a European context. The report found that central securities depositories (CSDs) would play an important role in a blockchain-based settlement system. It also stated that regulators should not fear the use of smart contracts and distributed ledger technology any more than any other automated computer-based process prevalent throughout the settlement industry.

As ‘custodians of the code,’ CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts. CSDs may continue to perform an important role as trusted, centralised FMIs (financial market institutions), providing gatekeeping services and oversight of the relevant blockchain.

With the implementation of a DLT-based settlement process there is no need to change the existing regulatory architecture. The authors believe that a blockchain-based settlement system would not present a weaker cybersecurity proposition than any present system, which is not immune to cybersecurity. By allowing regulators to participate as a node in the blockchain system, they could have complete oversight of all the transactions occurring within the settlement system and receive transparent transaction data in real time.

  1. Deloitte Survey: Corporate Executives Having Hard Time Wrapping Heads Around Blockchain

According to a recent Deloitte online survey of more than 300 senior executives at large US companies in order to find out about corporate sentiment towards blockchain technology, understanding of the technology is uneven and many senior executives (39 per cent) still know little or nothing about it, while others place it among their company’s highest priorities.

The survey revealed that blockchain investment and adoption patterns may be more complex than many observers believe. For instance, despite the relative immaturity of the technology, 21 percent of Blockchain-informed senior executives across a wide range of industries indicated that their firms have already brought blockchain into production, and 25 percent plan to do so within the next year. Key findings from the survey showed that 28 per cent of respondents had invested $5 million or more in blockchain technology, while 10 per cent had invested $10 million or more. Looking forward, 25 percent of respondents expect to invest more than $5 million in Blockchain technology during the next calendar year.

Many of these blockchain-informed executives (more than a quarter) see the technology as crucial for their company and their industry. Fifty-five percent of this group said their company would be at a competitive disadvantage if it failed to adopt the technology. Forty-two percent of those surveyed who claimed some knowledge of Blockchain believe it will disrupt their industry.

 

STARTUPS

Goldman, JPMorgan take a stake in blockchain startup Axoni

Goldman Sachs and JPMorgan Chase have announced finalizing an investment that is said to be in a range of USD 15 million to USD 20 million) in blockchain startup Axoni. The Axoni deal represents the latest Wall Street effort to gain traction with blockchain technology. Axoni is a New York-based technology company that helps banks and other institutions develop blockchain software to run capital markets processes. Furthermore, other financial institutions including inter-dealer broker ICA,  Plc’s venture arm,  are also interested in investing in the startup.

Over the past six months, Axoni has run a number of high-profile experiments with some of the financial industry’s largest players, in areas such as post-trade processing of credit default swaps and foreign exchange.

Digital Asset rolls out blockchain platform allowing confidential trades

Blockchain startup Digital Asset Holdings (DAH) has developed a platform to allow traders use blockchain technology without giving out confidential information on their trades. The new platform provides a solution to confidentiality issues holding back adoption of the blockchain technology in financial markets. They solve the privacy issue by dividing the distributed ledger of transactions into two components: one where participants can confidentially store their transactions data, and another that is shared by all participants without the confidential data.

Moreover, the new platform will form the basis of the technology that DAH is building for financial institutions including Australian stock exchange ASX and US post trade services provider the Depository Trust and Clearing Corporation (DTCC).

Manifold Technology rolls out easy-to-use blockchain platform

Manifold Technology, a US-based fintech, has made its patented blockchain platform available allowing non-technical developers to build enterprise-ready, blockchain-enabled applications. The platform has already been used by the Royal Bank of Canada for a rewards program, and by R3CEV consortium member banks to demonstrate instant trading of fixed income assets. The fintech’s platform can handle more than 10,000 transactions per second in operational environments, surpassing the largest credit card companies that can handle between 2,000 and 8,000 transactions per second.

Stellar’s blockchain powers ICICI Bank’s money transfers in India

Stellar, the open blockchain platform and non-profit payment protocol has partnered with ICICI Bank to bring low-cost, near instantaneous remittance solutions in India, the Philippines, Africa and Europe. Besides the bank, other three new partners in some of the largest remittance markets in the world were revealed by Stellar including: Philippines-based financial inclusion-focused fintech startup Coins.ph, pan-African fintech company Flutterwave which is notably plugged into the popular M-Pesa network, and French remittance provider Tempo Money Transfer, a licensed money transfer operator in Europe. This will allow Stellar customers be able to move money from France to Nigeria to Kenya to India in real-time and securely.

Overstock Issues Shares Using the Bitcoin Blockchain

Overstock.com, the online retailer, has become the first publicly-traded company to issue stock over the Internet, distributing more than 126,000 company shares using the blockchain technology. The company announced in October that it would allow its stockholders to purchase shares of its preferred stock. The company is making the offering to demonstrate its tØ platform, while providing its stockholders the opportunity to participate and trade exclusively using the platform.

Fintech Firm Wyre Raises $5.8 Million for “Fastest Blockchain Cross-Border Payments Platform”

San Francisco-based Fintech startup Wyre has launched its blockchain remittance platform alongside a successful $5.8 million funding round. Wyre intends to add its blockchain solution as a layer on top of existing blockchain-based platforms adopted by payment giants around the world. Fundamentally, the Wyre platform works by taking deposits from large payment companies via an API. These transactions are sent over Wyre’s ledger. Wyre then delivers the funds as per the transaction’s instructions, “typically in less than six hours”. Wyre’s focus lays in the cross-border payments corridor between China and the United States.

Sources: Euroclear Report: Blockchain Settlement – Regulation, Innovation, and ApplicationDeloitte Survey: Corporate Executives Having Hard Time Wrapping Heads Around Blockchain, Carlo de Meijer/LinkedIN article

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain: how to make it operational in your company?

| 29-11-2016 | Carlo de Meijer |

block-chainToday, I was invited to participate in a Challenge meeting at the Euroforum Fintech event in Amsterdam. My challenge was the following. Suppose we are somewhat further in time. Blockchain is far beyond the hype, the initial overdone expectations have been brought to a more realistic level and the technology is generally accepted as having enough opportunities for the financial industry. Your company is convinced this technology will suit their business. A number of blockchain applications have been chosen to use in your day-to-day activities. That is the easy part.

Now the decision has been taken to adopt this technology, there comes a new challenge: how to integrate blockchain and implement this technology into the existing business and incorporate it within your legacy enterprise applications. In other words: how to make it operational!

Making blockchain work: the Challenges

That is where the real work starts. Making blockchain applications work in the real day-to-day world. That may prove as much of a challenge – or even more than that – as building the blockchain application itself. Because blockchain is a complete different and unprecedented, technology, corporates are confronting problems related to integration of the blockchain into the enterprise. Most financial organisations have to take into account their existing complex business lines and the legacy (and mostly old) technology they use. But also the various regulatory obligations have to be taken into consideration.
And there is another – maybe even bigger – challenge. Most banks nowadays heavily depend on massive and (capital-) expensive financial processing systems. These are often 15 years old (or even older!). But these systems do power the many transactions between the world’s major businesses and governments. Trying to overhaul them altogether is a formidable task, and may come with a huge risk. Disrupting them, even for a short time, could be disastrous.

Blockchain integration: points of attention

When deciding to integrate blockchain in your company, you should take a number of important issues into consideration. Every financial company that is serious about blockchain needs also to be serious about issues such as: compliance and regulatory requirements; Enterprise integration with internal systems and data repositories; connectivity to a partner ecosystem; interoperability requirements and access layer; visibility into—and real-time monitoring of—blockchain-based transactions; automated process orchestration; life cycle events; access controls; governance, and more.

Compliance and regulatory requirements

In the near term, KYC/AML models should be developed that could be integrated into enterprise blockchain. Without a thoughtful consideration of KYC/AML and other related regulatory applications, it will be a difficult story to realise that. These models should include concepts such as an inter-ledger, side chains etc. But in such a systematic way to take advantage of blockchain’s way of processing transactions. These models should enhance existing AML/KYC processes thereby overcoming shared data/ledger challenges.

Enterprise integration with incumbent internal systems and data repositories

Another consideration is: how to integrate blockchain with incumbent record systems. Corporates have been creating their own business systems to better measure and manage the business. These include issues such as reporting, analytics, business application management, dashboard, counter-fraud management, etc. Many of these systems “feed off” of the enterprise’s System(s) of Record (SoR) with all kind of information. Integration blockchain in an enterprise suggests a system design around integrated transaction systems (trust systems) and record systems (shared ledger); any application that is either transitioning or originating using blockchain technology would need to consider the enterprise systems for tangent business activity.

Interoperability and access layer

And there is the interoperability issue; may be the most important one. Interoperability of blockchain within an enterprise will be key. Every enterprise has legacy technology that must be interoperable with blockchain, from KYC to risk management and settlements. These applications have to engage seamlessly with the new blockchain applications. In order to make that possible, organizations need to use a so-called access layer to ensure complete interoperability. Such an access layer makes it possible to abstract the complexities of blockchain and smart contracts; expose the functionalities of the blockchain application; and, communicate them to legacy applications.

Automated process orchestration

Although private blockchain transactions occur in a closed environment, they however may impact events both inside and outside the chain. Technology is thereby critical to make these on-and off-chain applications interoperable in an automated fashion. Automated process orchestration is thereby needed, as it enables blockchain events to trigger processes across multiple off-chain and on-chain applications.

Life cycle event

Lifecycle events need to be managed too. Through a total surveillance module, the access layer has complete visibility of every event in the blockchain network; with that visibility the analytics engine can detect anomalies and gather intelligence. For example, when a counterparty exercises an option on a smart derivatives contract in the blockchain, that event needs to be captured and propagated to the same downstream systems. Similarly, external events, such as those relating to market data, will also need to be monitored and applied to the smart contracts. You will need to plan for integrating those systems. But before doing that you will have first identified what systems are affected and how.

Governance

And there is the governance issue. What happens in a blockchain application can have an impact across the whole enterprise. So careful monitoring off- and on-chain is necessary in order to enable proper governance, risk management and security of the entire network. Integration that is technology-neutral and the ability to establish and execute the policies required for good governance are key to the blockchain access layer. API-based integration could thereby be of help.

Other requirements

But here it does not end. New higher-level processes may also need to be established to exploit the benefits from the blockchain ecosystem. The interoperability between systems will have to be agile, secure and have robust governance. It should be prevented that enterprise applications would be exposed to any complexities of the blockchain. Operationalizing blockchain also addresses the need for access controls over the participants, from both an application and business context, be it internal or external to the enterprise.

Integration: steps to be taken

To gain the real advantages of blockchain technology, a company must be able to rapidly, but seamlessly utilize blockchain. Without having to run complex, costly and lengthy re-architecturing programs. But what is the best approach to operationalize blockchain?

Here are six steps you should keep in mind:

First, you need to connect to a (private or public) blockchain ecosystem and/or with external parties using the blockchain.
Second, you have to integrate blockchain applications with existing technology.
Third, you will have to decide how to interact with the blockchain ecosystem, with regards to security and access controls.
Fourth, you have to figure out how to monitor transactions and events on the blockchain and react to them in real time.
Fifth, you have to decide how to reconcile data that exists in blockchains as well as legacy applications.
Sixth, you have to automate, coordinate and manage the processes that span both existing technologies and blockchains.

Conclusion

While blockchain technologies are viewed as a disruptive force for the existing financial systems and market infrastructures and may fundamentally change the way the financial services industry operates day-to-day business, the challenges of enterprise adoption and integration need to be addressed as well.

The introduction of blockchain in your company will require the well needed time. You will have to address the enterprise issues around transaction audibility, visibility and integration into existing business functions. Without this, a profitable integration of the blockchain in the company will prove to be a difficult storey.

Of course this story is not yet complete. I will definitely have forgotten things that must also be considered. But this is a start!

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Could blockchain bring the EU Capital Market Union forward?

| 10-11-2016 | Carlo de Meijer |

blockchainThe European Commission recently launched an update report on the state of the Capital Markets Union (CMU) project. A comprehensive program of actions set out a year ago to put in place the building blocks for this CMU by 2019. Aim is to create deeper, and more integrated capital markets across the EU to lower costs and make the market more resilient. One year later this project is still “lacking an organic and coherent set of actions to bring down cross-border barriers and create a single market for capital, which could support the effectiveness of monetary policies”, according to the Commission.

It however is important that the CMU project moves forward with greater speed. A financial market infrastructure that would permit more funding via the capital market is however not yet in place. Besides under CMU categorisation, post trade issues are considered long(er) term actions.

An intriguing question is: Could blockchain play a role in bringing the EU Capital Market Union forward?

Existing inefficiencies

But first, why a European Capital Market Union? The free movement of capital across the EU is one of the three key freedoms enshrined in the Treaty of Rome. This however is still far from its realization.

Over-reliance on bank financing

Europe’s businesses cannot fully exploit the opportunities of an efficient EU capital market. They are over-reliant on bank financing such as bank loans. Many small and medium enterprises (SME) have limited access to the financial markets, especially to venture capital and capital markets. Access to capital markets in Europe is unequal and varies significantly across member states. Investments in shares and corporate bonds occur mainly domestically, where different rules and standards apply.

 “The proportion of European company finance that comes from banks is high, around 80 per cent. Less than 20 per cent comes from investors. Figures from the US are the opposite. While the European economy is as big as America’s, bank loans in the US account for less than 30% of total funding for businesses, Europe’s equity markets are less than half the size, its debt markets less than a third”, according to Deutsche Bank Research.

Fragmented market infrastructure

In Europe, we have a very fragmented capital market infrastructure (unlike in countries such as US and Japan). Though there has been some moves towards consolidation, mainly at the exchange level, there is even more fragmentation now despite the efforts taken by the industry since 2000.

At present there are 102 regulated markets, 151 multilateral trading facilities, 20 central counterparties (CCPs), 42 central securities depositories (CSDs) or securities settlement systems (SSSs) and 6 trade depositories.

Insufficient regulation

In the post-crisis environment European financial authorities have recognized the importance of efficient market infrastructures at the trading and post-trading levels. They have introduced  regulations providing guidelines targeting CSDs and CCPs, and aiming to organise their activities in a harmonised way such as CSDR and EMIR. These regulations should bring further harmonisation in the fragmented post-trade area. And there was the launch of T2S,  which aims to eliminate cross-border settlement among participant CSDs.

However: this is a very long process that is still ongoing. These pieces of legislation are either still in planning phase or have only partially been rolled out. Others – namely on settlement discipline – have not yet been proposed. The experience with T2S demonstrates how difficult and lengthy the creation of single market infrastructures is. T2S has gone live, but three more migration waves are needed before implementation is complete. Although T2S only concerns settlement, it should create harmonisation in the custody industry.

Capital Markets Union: the goals

On 30 September 2015 the European Commission launched an action plan setting out key measures to achieve a true single market for capital in Europe. With many obstacles to domestic and cross-border capital movements as well as underdeveloped and fragmented capital markets – especially compared to the US – leading to lower levels of diversified funding for the economy, there is a need for action. In the current political and economic context developing stronger capital markets in the EU is seen as even more important.

An EU Capital Market Union is seen as the logical next step in the integration of European financial markets. The idea thereby is to transform European finance from a primarily bank-based financial system into a system wherein most of the funding is channelled directly to firms and households through non-bank financial institutions and securities markets.

The CMU has three pillars …..

  1. Unlocking investment for companies, including SMEs and infrastructure projects
  2. Attracting investments from outside the EU from
  3. Opening up the EU’s real economy to new investment sources

…… and six goals

  1. Financing for innovation, start-ups and non-listed companies
  2. Making it easier for companies to enter and raise capital on public markets
  3. Investing in long-term infrastructure and sustainable investment
  4. Fostering retail and institutional investment
  5. Leveraging banking capacity to rapport the wider economy
  6. And, facilitating cross border investment

The vision

Through a Capital Markets Union (CMU), the Commission is striving to increase the benefits that capital markets and non-bank financial intermediaries can provide to the economy. By improving the effectiveness of these markets, where barriers and fragmentation will be replaced by deeper and more integrated capital markets. This should contribute to improved stability, capital allocation, business growth and innovation. A single capital market would facilitate improved cross-border risk sharing, more liquid markets and a wider variety of sources of funding.

“This is done by unlocking the capital around Europe, by removing obstacles to the free flow of capital across borders and providing savers cross-border investment opportunities and offering business a greater choice of funding options at lower price” (European Commission, 2016).

The effectiveness of the market could thereby be enhanced with a single rulebook approach, enforcement and competition; supervisory convergence; data and reporting; market infrastructure and securities law; company law, corporate governance, insolvency and taxation; as well as technology.

Challenges

One year after the launch of the CMU Action Plan, the EU faces a number of important challenges that could impact the Capital Markets Union.

Political

The EU is confronted with a number of political issues. According to the head of ESMA, one of these that could really hurt the plans for this Capital Markets Union is Brexit, the upcoming British exit from the European Union. Being the European biggest financial center, London was supposed to play a central role in the CMU and be one of its biggest beneficiaries.

Regulatory

But there are also serious regulatory challenges. Work towards a CMU seems even more complex and politically difficult than the building of the European Banking Union. This given the extremely diverse legislative and regulatory setting of non-bank finance in EU countries, and the resistance of national authorities to release powers to Europe. It is therefore important to progress quickly towards the adoption of forthcoming legislative/regulatory proposals.

Technology

And last – but maybe the most important – there are the technological challenges. The capital markets are currently witnessing a remarkable wave of disruption and innovation, driven by new technologies. Technology has the power to increase the role of capital markets, and bring them closer to companies and investors. It is a driver of competition and helps to create a more diverse financial landscape.

 

Nasdaq: the wrong focus?

In a report by Nasdaq “Capital Markets Union: The Road to Sustainable Growth in Europe” , the US exchange stated that the concrete measures in the CMU Action Plan mainly focus on making it easier for large institutions to invest more and extend their product and service offerings, rather than improving the capital markets themselves.

For Nasdaq that is the wrong focus. Instead, the Action Plan should focus on increasing transparency, making the capital markets more accessible to smaller businesses, incentivizing long-term private investment in listed equities, and above all encouraging the development and use of disruptive technology to improve the post-trade environment.

An independent report by Systemic Risk Centre, co-hosted at the London School of Economics and University College London, also states that a successful CMU must embrace disruptive technologies.

“The EU and national authorities must alter existing regulatory structures if the CMU is to be achieved, encouraging disruptive technologies and allowing market forces to match savings to investment opportunities more efficiently”, according to the report.

 

Fintech and blockchain

One area that lies in the center of the technology revolution is the Fintech sector. Next to upcoming regulation, the booming FinTech industry is set to be a strong influencing factor on the planned Capital Market Union. They have the power to seriously disrupt EU capital markets. The technological advances they bring are accelerating, creating new business propositions and revolutionizing the way the financial industry operates. New technologies including blockchain may bring new asset classes to capital markets, but also create inroads for new and currently underserved investors as well as SMEs to access and use traditional financial services.

Blockchain: “el Salvador”?

Of all Fintech trends the most discussed and promising is blockchain– which enables transactions to take place on a distributed ledger that is maintained by a network of computers. This technology is attracting industry-wide interest. The financial industry is now actively looking into opportunities this blockchain technology could bring. They thereby are increasingly engaging with industry bodies as well as clients and blockchain providers to bring more efficiency to the financial industry. Nasdaq is a “big believer” in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial services industry.

 “Changes are afoot that hold the potential to revolutionize the way we think about and interact with the world of finance as businesses, investors and consumers,” states the report, while cautioning that “more needs to be done within the scope of the CMU to explore the opportunities offered by this (blockchain) technology.”

CMU and blockchain applications

The role that blockchain could play in a CMU environment is intriguing. According to a growing group blockchain technology could be a catalyst for greater integration of Europe’s financial markets by helping break down some of the long-standing barriers to cross-border investment. This technology brings both opportunities and challenges. Blockchain technology promises to bring financial markets into the XXI century with real-time settlement, corporate actions and risk management.

There is little doubt about the potential gains this technology could deliver in terms of lower transaction costs, shorter delays and greater convenience. The existing market infrastructure is being challenged by blockchain applications that have the potential to render contracting and settlement between market participants cheaper and faster. It may allow full-fledged real-time settlement, corporate actions and risk management services.

In line with the CMU, the potential of a blockchain/DLT venture capital platform could facilitate the supply and demand for SMEs with regards to funding. Either by debt issuing, turning savers into investors and providing more capital access options to companies.

Or by shares issuing – against a light prospectus regime – turning savers into owners. This could be a type of regulated crowd funding by issuing existing financial market products like shares and bonds, but without the burden of legacy systems and infrastructures.

Transforming market infrastructures

Blockchain could prove to be a perfect use case for a complete reform of the securities post-trade value chain, transforming the market infrastructures. This technology has the potential to wipe out traditional post-trading players. As blockchain removes the need for a number of intermediaries in the securities lifecycle, this may lead to substantial shifts in the role of the different market participants and in the organisation of the post-trade landscape. Large central bodies such as clearing houses (CCPs) and central securities depositories (CSDs) would not be needed in a world where the settlement of transactions is completely reorganized and executed real-time and those activities are greatly taken over bij the distributed ledger.

No complete disintermediation

It however is not expected that there will be a complete disintermediation of service providers. While the role of custodians would greatly disappear and those of clearinghouses and CSDs will drastically change in a blockchain environment, the rest of the value chain in the securities industry may remain largely intact. The functions associated with tracking, reconciling, and auditing enormous amounts of data are not going to be disintermediated away. They have to continue to exist, but just need to be done more efficiently, at lower cost and with fewer errors. And also the bulk of financial infrastructures dominated by financial institutions will largely remain. As most of their activities in this area are related with the provision of intermediated capital funding.

 

European Commission and Fintech

But how is the attitude of the European Commission towards Fintech in general and blockchain particularly?

“Fintech has the power to increase the role of capital markets, bringing them closer to companies and investors” says the European Commission.

As it bids to push the CMU, the Commission is increasingly backing fintech in capital markets. The Commission is thereby highlighting the role that technology including blockchain could play as a driver of competition that helps to create a more diverse financial landscape bringing more choices to consumers, companies and investors.

However, “at the same time, the rapid development of fintech poses new challenges in managing risks and ensuring consumers have adequate information and safeguards,” warns the Commission

They agree that this innovative potential should be harnessed. In a number of EU Member States, regulatory authorities are already developing new approaches to support the development of FinTech firms, including hubs providing regulatory guidance or teams focusing on policy implications of FinTech. The European Commission supports this development and will continue to promote the development of the FinTech sector and work “to ensure the regulatory environment strikes an appropriate balance between building confidence in companies and investors, protecting consumers and providing the FinTech industry the space to develop”.

The Commission will work with the European Supervisory Authorities (ESAs), the European Central Bank, other standard setting bodies, and the Member States to develop a co-ordinated policy approach that supports the development of FinTech in an appropriate regulatory environment.

Buts!!

There are however still a number of buts!!! The directions that these blockchain related developments will take in the end are not (yet) entirely clear. For example, it will most likely take some years before blockchain will have a real, potentially disruptive, impact on parts of the financial services industry. And what those really will be?

And it is also far from certain whether there is a reason to assume that this blockchain technology would, on the whole, eliminate the prevailing risks of the capital markets. While it is certainly true that the opportunities blockchain are promising, digital finance is not immune to errors, manipulations, hackings and other dishonest practices.

The self-regulation of blockchain technology is no panacea either: legal issues have already arisen and any application involving risks to the financial sector will still require supervision. The Commission has the vision that one therefore should not attempt to create an artificial separation in financial regulation, but should instead treat technology neutrally.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

 

Blockchain, near real-world projects and collaboration: viable approaches

| 25-10-2016 | Carlo de Meijer |

blockchainIn one of my earlier blogs I wrote that we are beyond the hype of blockchain and distributed ledger technology. Support in the financial industry and beyond for this technology is accelerating in a rapid way. A lot of time and money is now invested into blockchain and its applications.

Distributed ledger technology is set to move out of the test environment and into the wild next year, with nearly two thirds of banks expecting to be in production with full-scale, commercial blockchain projects by 2019”, according to recent research from IBM.

If so, that would mean much earlier than the 2020 to 2025 period that was earlier predicted for mass adoption of blockchain technology.

Collaborative near real-world examples

Financial institutions, technology companies as well as start-ups are increasingly collaborating on projects and pilots (or are planning to do so) to use distributed ledger/blockchain technology in trade finance, payments and securities. Next to existing platforms such as Ripple (payments), there is a growing number of collaborative initiatives including the Distributed Ledger Group (R3CEV) and the Hyper Ledger Project (Linux Foundation) (see earlier blogs). This could really accelerate the whole process towards mass adoption.

The first collaborative near real-world tangible use cases and practical applications of distributed ledgers  in the financial industry are now being brought to the open. And more are expected soon. Here follows a number of interesting examples of actual projects, initiatives and trials. Main question is: will they be viable in the long run?

R3CEV

Credit Suisse (syndicated loans)

Led by Credit Suisse and the bank-backed blockchain consortium R3CEV, a group of seven member banks (BBVA, Danske Bank, Royal Bank of Scotland, Scotiabank, Société Générale, State Street, US Bank and Wells Fargo) and a number of buy-side firms have started a new initiative to apply distributed ledger technology to overhaul “antiquated” and costly manual intervention in the global syndicated loans market. Goal is that in the future, syndicated loan data processing can be done exclusively on the distributed ledger, eliminating the cost for each market participant to maintain its own separate lending system. The Swiss bank is working with Synaps Loans (a joint venture created earlier this year through a partnership between smart contract vendor Symbiont and loan settlement platform provider Ipreo), on a proof-of-concept (PoC) which will run through the end of this year. Through Synaps, loan investors have direct access to an authoritative system of records for syndicated loan data. By connecting a network of agent banks through blockchain, faster and more certain settlements in the syndicated loans market can be achieved. This allows immediate savings by reducing manual reviews, data re-entry and systems reconciliation.

R3CEV and eight member banks (treasury bond trading)

Working under the R3CEV flag, a group of eight member banks have successfully tested a distributed ledger prototype for bond transactions. Thereby they used an implementation of Intel’s proprietary distributed ledger platform, Sawtooth Lake, for the trial. The platform featured advanced smart contract functionality, enabling trading, matching and settlement of US treasury bonds on-chain, as well as automated coupon payments and redemption based on network time and third party data sources. The partners used physical, non-cloud-based nodes hosted across the US, Canada, Asia, Australia and Europe to interact and simulate US treasury trading on the ledger. In addition, the technology enabled an on-chain identity registry to facilitate the permissioning of validators and transactors, and the association of those roles to different organisations. Intel is now donating the bond-related transaction families developed for the trial to the Hyperledger Project.

R3CEV and 15 member banks (Letter of Credit)

R3CEV and 15 of its consortium member banks successfully completed a number of prototypes using distributed ledger technology for trade finance purposes. The involved member banks in the trials (including Barclays, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natxis, Nordea, Scotiabank, UBS, UniCredit, US Bank and Wells Fargo), designed and used so-called smart contracts on R3CEV’s Corda distributed ledger platform to process accounts receivable (AR) purchase transactions, invoice financing or factoring, and letter of credit (LC) transactions. Estimates suggest that “such technology has the scope to reduce operational and compliance costs of paper-based trade financing by 10 to 15% and provide a platform for banks to grow revenues by as much as 15%”.

R3CEV and 40 member banks (Commercial Paper trading)

R3CEV and 40 member banks have successfully completed a number of cloud-based ledger experiments. The (then!) 40 member banks were connected to five different R3CEV managed private distributed ledger technologies. Objective was to test, compare and evaluate the strengths and weakness of different blockchain offerings on the market today. The banks thereby modelled a series of smart contracts that were programmed to manage Commercial Paper transactions including facilitate issuance, secondary trading and redemption of Commercial Paper. Each of the distributed ledgers thereby ran a smart contract based on identical business logic to enable the banks to accurately compare the difference in performance between them. These experiments followed a test in January to unite eleven global financial institutions on a private distributed ledger provided by Ethereum.

Barclays and R3CEV (smart contracts repository)

The R3CEV blockchain consortium is working with Barclays Bank, ISDA and legal and academic bodies to explore the development of a repository of master templates for smart contracts when trading and managing securities on distributed and shared ledgers. The new group, has been set up to address the challenges of developing master templates for smart contracts, with an initial focus on how they could be implemented within existing legal and regulatory frameworks. Earlier this year, Barclays Bank demonstrated a Smart Contract Templates prototype creating an ISDA agreement and an interest rate swap trade that then executed as a smart contract on R3CEV’s Corda platform.

Credit Suisse and others (reference data management)

Coordinated by Credit Suisse and working with R3CEV and capital markets tech startup Axoni, seven buy-side and sell-side firms (including Citi and HSBC) have completed a multi-months proof-of-concept (PoC) exercise, which aimed to simplify reference data processes through a distributed ledger prototype. The prototype was created using proprietary distributed ledger software of Axoni (a distributed fintech solutions company) to simulate the collaborative management of reference data, as well as the use of that data for corporate bond issuance. Participants could interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, immutable record of all data related to the bond. The results show how blockchain technology could be used to allow regulators and network participants to view in real time which parties on the ledger have created, issued and proposed amendments to the data record. “This may remove the need to reconcile multiple copies of data and help reduce duplicate reference data costs and improve data latency which will ultimately lower costs and reduce operational risks”, according to Credit Suisse.

Hyperledger Project

UBS and IBM (trade finance)

Swiss bank UBS and IBM  have designed a project that replicates the entire lifecycle of an international trade transaction on Hyperledger`s Fabric blockchain. The trade finance project that is still in its earliest stages and focuses on just a single aspect of the process, combines payment transactions, foreign exchange payments and more, into one single, elaborate smart contract. By programming that process into a smart contract on Hyperledger, UBS “expects to be able to cut the processing time down from seven days to one hour”. Besides the letter of credit process, the project also aims to incorporate the account opening process, to build a user-friendly interface “capable to operate on the go, from a transportation vehicle for example”. It remains unclear how long it will take to complete the international trade project, according to UBS.

CLS (payments netting service)

CLS, the multi-bank foreign exchange counterparty, is to build a payments netting service for trades settled outside the core membership thereby using distributed ledger technology based on the Hyperledger Fabric. CLS wants to use its position to standardise and expand bilateral payment netting capabilities for the entire FX market, eliminating intra-day liquidity demands caused by inefficient “bespoke” approaches to netting throughout the market. The company has signed up 14 banks as early adopters of the proposed service, which will accept FX instructions for six products, including non-deliverable forwards (NDFs), and 24 currencies over existing SWIFT-based channels. Participants will also have the option of connecting directly to the platform via a permissioned distributed ledger, administered by CLS using Hyperledger Fabric. CLS will be working with IBM to build new infrastructure. The new service will be delivered in a phased approach – subject to regulatory approval – beginning with a payment netting service for FX spot, forwards, NDFs, swaps, tomorrow/next day and same-day trades across the 18 currencies CLS currently settles, as well as the Chinese renminbi (offshore), Russian rouble, Polish zloty, Turkish lira, Thai baht and Czech koruna.

Bank of America Merrill Lynch/HSBC (Letter of Credit)

A bank consortium consisting of Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority (IDA) of Singapore successfully applied distributed ledger technology to replace paper-based letters of credit (LCs) in trade finance transactions and streamline global trade. They thereby used the open source Hyperledger Project software for the prototype app, supported by IBM Research and IBM Global Business Services. By sharing information between exporters, importers and their respective banks on a private distributed ledger, this enabled them to execute a trade deal automatically through a series of digital smart contracts. The partners now plan to conduct further testing on the concept’s commercial application with selected partners such as corporates and shippers. Their challenge is to take this from concept to commercial use “making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad.”

BTMU and IBM (contract management and trade finance)

The Bank of Tokyo-Mitsubishi UFJ (BTMU) and IBM are collaborating to use blockchain technologies for the design, management and execution of contracts among business partners. They thereby make use of the Hyperledger Project’s open-source platform to automate business transactions with each other on the IBM Cloud. Both partners have built a prototype of smart contracts on a blockchain that should improve the efficiency and accountability of service level agreements in multi-party business interactions. To help improve efficiency, the two will monitor delivery and usage of equipment with a sensor that embeds information into the blockchain. This will then automate invoicing and payment processes between the two companies. BTMU plans to begin using it to manage contracts within their business in fiscal year 2017.

JPX and IBM (post-trade settlement and proxy voting)

Officials of the Japan Exchange Group (JPX) and IBM Japan recently announced advanced plans to test the use of blockchain technology for post-trade settlement and proxy voting. The exchange will investigate how blockchain technology could be used to create new systems for the trading of low-liquidity assets. They thereby will use the framework provided by the Hyper Ledger Project. JPX is also working with Nomura Research Institute (NRI) and several major financial institutions (including SBI Securities, Mitsubishi UFJ Financial Group and blockchain specialist Currency Port) to test the use of blockchain technology for future applications across the securities industry. Until the end of June, the partners have examined various business scenarios and validation items involving distributed ledger technology and prepare prototype systems based on those scenarios.

Credit Mutuel Arkea (verify customer IDs)

Credit Mutuel Arkea has completed a pilot of an operational permissioned blockchain network to verify customer “bona fides” in compliance with Know Your Customer (KYC) requirements. Using the open-source Hyperledger Project fabric, the software “tapped into all valid existing evidence” already stored in the bank’s multiple systems of record such as from mortgage applications or life insurance enrolment and bank accounts opening. Following the success of the initial pilot, Credit Mutual Arkea plans to work with IBM to integrate the different silos of customer data across the bank to create a single ID data chain that can be used across all business processes.

Ripple

The Ripple network recently announced that seven banks including Santander, CIBC, UniCredit, UBS, ReiseBank, National Bank of Abu Dhabi and ATB Financial of Edmonton “had made a breakthrough by being among the first financial institutions in the world to move real money across borders using blockchain-based distributed ledger technology provided  by Ripple”. Focus is thereby on international, low-value, high-volume and velocity payments (as these can often be expensive and not profitable for banks). The seven banks are all planning to deploy Ripple commercially, while most having already moved real money via the network.

In the meantime Ripple has signed up several major banks to a steering group on the use of distributed financial technology for global payments (including names like: Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac, and Royal Bank of Canada). The creation of the  Global Payments Steering Group (GPSG), is significant because this represents the first time that major banks have formulated policies to govern the transfer of money across borders using blockchain. The group will oversee the creation and maintenance of Ripple payment transaction rules, formalised standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities. This Group might become a great competitor for SWIFT.

Standard Chartered (trade finance)

The first bank-developed blockchain platform for trade finance was the product of a partnership between Standard Chartered, the Development Bank of Singapore (DBS) and the Infocomm Development Authority of Singapore (IDA), the government’s IT and communications arm. They developed a blockchain-based invoice trading platform (code-named TradeSafe) that uses the distributed ledger technology developed by Ripple. Invoices and bills of ladings are allocated unique identifiers and stored on this distributed ledger. The use of unique identifiers enables users to view the status of a particular invoice/bill, but also reduces the risk of duplicate financing of the same invoice/bill. Further, to maintain confidentiality, users are allocated encrypted identities.

ATB Financial and Reisebank (international interbank payment)

SAP (the world’s third largest independent software manufacturer), partnered with Ripple and two banks, ATB Financial (Canada) and Reisebank (Germany), to demonstrate how banks can improve the efficiency of cross-border payments by using blockchain technology. For that SAP and Ripple designed and built a proof-of-concept (PoC) prototype based on this technology (thereby connecting SAP HANA Cloud, the open platform as a service (SaaS), and the SAP Payment Engine application, which centralizes payment processing in one solution with Ripple’s network of enterprise blockchain solutions).

This prototype was used to send the first international interbank blockchain payment of CAD $ 1,000 from ATB Financial to Reisebank. With parties representing different continents, this cross border payment transfer using blockchain technology was completed successfully. The payment which would normally have taken between two to six business days to process “was now completed in around 20 seconds, so nearly instantaneous”. In addition for being far quicker, this blockchain payment transaction cost a fraction of current transaction rates.

Japanese bank consortium (real-time settlement and domestic fund transfers)

A consortium of 15 Japanese banks are to work with blockchain joint venture SBI Ripple Asia, to build a new payments platform for 24 hours real-time settlement and domestic fund transfers, thereby using Ripple’s blockchain technology. This should firmly reduce the fees currently paid by banks for performing cross-border transactions and pave the way for the arrival of real-time domestic and cross-border payments. Initial participants include Bank of Yokohama and SBI Sumishin Net Bank (SBI Holdings owns part of it). It is expected that the size of the consortium will increase to 30 banks, and that the new service will go live in Spring 2017.

Santander (cross border payments)

Santander has become the first major UK bank (and the first bank in the world) to use Ripple for cross border payments. Starting in May Santander has begun piloting a Ripple-powered payments app built on the blockchain technology, that facilitates international payments. The app, currently being tested by bank staffers, connects to Apple Pay, and allows cross-border payments to be made between GBP 10 and GBP 10.000, around the clock and at any time of the day, using Touch ID. Funds appear in the recipient’s account the next working day. These transfers can be made from sterling to euros and US dollars (currently payments made in euros can be sent to 21 countries and US dollar payments to America only). The results of this trial will be used to assess whether to bring this technology to its customer base at a later date.

Foundational challenges

When it comes to blockchain, we may say that we are beyond the hype. The many experiments, proof of concepts and other real-world trials with blockchain technology are all evidence of that. And we will see many more of them this year and beyond. But quoting Terry Roche of Tabb Group in a recent blog the technology now needs to deliver real-world benefits.

While blockchain’s promises remain bright, however, there are (still) numerous foundational challenges (process, technical, community, etc.) that the financial services industry needs to overcome to get a beneficial blockchain world.

While all these projects ask a lot of investments, not all of them may prove to be viable in the end. The financial industry however has no endless funds available to explore endless options.  In today’s constrained technology marketplace, there needs to be a defined and realizable gain associated with any project for firms to fund it. That is why the industry should prevent dead-end options and only focus on viable applications that have a long-term future and suits best in their business model!

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

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!

Should SWIFT be afraid of blockchain technology?

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