By Joshua Satten, Director of Business Consulting, Sapient Global Markets
Recently, I led a panel discussion on blockchain case studies at the Securities Industry and Financial Markets Association (SIFMA) Asset Managers Forum in New York. The panel presented diverse perspectives on the current state of blockchain across the financial industry with representatives coming from State Street, IHS Markit and SIFMA. While each panellist had a unique view, two main takeaways emerged:
1. Blockchain technology is becoming more divergent as it progresses and company use expands
2. Blockchain is having a wider appeal within government in terms of both understanding it for potential regulation and applying it for its own use.
These two trends underscore just how multidimensional the blockchain landscape is at the moment. On one hand, blockchain is growing in every dimension simultaneously, making it extremely complex. On the other hand, regulators are looking to understand how it should be regulated, as well as how it relates to finance and other industries as firms, including those across capital markets, evaluate differentiated use cases that don’t disrupt, but add value to, their businesses.
It’s no surprise that in the past 12 to 18 months, a lot of time, effort and money has been dedicated to blockchain or distributed ledger technology (DLT) experimentation. However, the challenge is no longer what a firm, or the industry, can do with the technology. Rather, the technology is potentially challenging what and how firms operate by dismantling and re-imagining elements of the value chain and associated infrastructure.
A trade repository is one potential use case. If you can visualise a trade repository that is real-time and two-way, then it would evolve from something that is inherently batch-processing and reconciliation-based to something that is real-time and more verification or synchronisation-based. The industry could have almost instant insight into information that companies are sharing to ensure the information is the same on both sides of the trade, no matter who is verifying or reconciling it. It could offer the ability to do that en masse and in a normalised fashion across a process.
Identifiers and other kinds of reference data used in regulatory reporting could also be issued onto a blockchain network to be consumed by end users. That could mean Legal Entity Identifiers (LEIs), International Securities Identification Numbers (ISINs) and perhaps instrument reference data would appear on a blockchain, which could then be accessed by firms. This kind of application could mean savings for firms that constantly have to upgrade their reference data platforms.
The Local Operating Units (LOUs) that issue LEIs might become redundant if there were a large scale DLT process backing LEI generation. With the concept of oracles and nodes automating these processes you are not dependent on one governing body or one group. You could have multiple groups issuing identifiers onto a blockchain and multiple consumers of that information all having equal access to it.
However, the complexity of these processes means they are still years away from fruition. Instead, 2017 is likely to be a year of more sober, smaller scale, development and the delivery of applications that further showcase the benefits the technology can provide. The DTCC’s recent announcement of a large scale pilot to ‘re-platform’ the existing Trade Information Warehouse, which automates record keeping, lifecycle events and payment management for approximately $11 trillion of cleared and bilateral credit derivatives, is a milestone on this journey. The challenge now will be if it can deliver significant cost and operations savings, as well as support more efficient operational processes as outlined above.