1. Systemically Important Ledger Systems?
A recent speech by CFTC Commissioner Giancarlo includes an excellent four paragraph summary on the potential benefits to market structure from the application of shared ledgers; namely, the potential to facilitate the currently mutually exclusive benefits of reduced systemic risk and reduced burden of regulatory compliance:
The 20th century underpinnings of the current “closed ledger” financial system are inefficient and unstable. At present, centralized third parties authenticate financial information in generally three-day settlement timeframes that add undue risk, cost and volatility to the marketplace. The 2008 financial crisis revealed that a portion of the recordkeeping infrastructure of the multi-trillion dollar swaps market was recorded on handwritten tickets faxed nightly to the back offices of market counterparties.
Distributed open ledgers have the potential to revolutionize modern financial ecosystems. Unlike current settlement processes, distributed ledgers use open, decentralized, consensus-based authentication protocols. They allow people “who have no particular confidence in each other [to] collaborate without having to go through a neutral central authority.”
This theme of potential systemic benefits via the application of this technology is one that we continue to explore in our work and design. For another interesting take on mapping potential benefits, see William Mougayar's handy mind map here.
2. Banks and Blockchains
Goldman Sachs made the headlines twice this week. First, their "Emerging Theme Radar" featured a report on how "the Blockchain [is] ready to take center stage."
It [blockchain] has the potential to redefine transactions and the back office of a multitude of different industries. From banking and payments to notaries to voting systems to vehicle registrations to wire fees to gun checks to academic records to trade settlement to cataloguing ownership of works of art, a distributed shared ledger has the potential to make interactions quicker, less-expensive and safer.
The bigger headline was the report of a filed GS patent for "SETLcoin", a process for security settlement via cryptocurrency which closely resembles other colored coin approaches. This filing follows the lead of earlier filings from JP Morgan and Bank of America.
Deutsche Bank was also in the news, announcing the success of a proof-of-concept demonstrating the issuance of a corporate bond onto a blockchain (echoing earlier work done by UBS). The iteration and experimentation is an important step in the adoption curve of this technology, yet it is not without its (many) bitcoin-based detractors. As an antidote to that, Antony Lewis lays out a very well written overview (with some handy definitions) of internal blockchains, and flips around the usual Reddit reply of "why!!?!?!" to "why not?"