Greetings to an abbreviated Read, as your author has contracted a severe case of Spring Fever. I will be attending Monday's Barclays Accelerator Demo Day in London, so if you are there please find me in the crowd (or follow the action here).
I had the pleasure to attend the IIF's Blockchain Roundtable this past Thursday. One of the views presented was from U.S. Federal Reserve Board of Governors member Lael Brainard. You can find a transcript of her speech here as well as a CoinDesk summary here:
The resulting Internet of Value holds out the promise of addressing important frictions and reducing intermediation steps in the clearing and settlement process. For example, in cross-border payments, faster processing and reduced costs relative to current correspondent banking are cited as specific potential benefits. Reducing intermediation steps in cross-border payments may help reduce costs and counterparty risks and may additionally improve financial transparency.
In securities clearing and settlement, the potential shift to one master record shared among participants has some appeal. Having one immutable record may have the potential to reduce or even eliminate the need for reconciliation by avoiding duplicative records that have different details related to a transaction that is being cleared and settled. This also can lead to greater transparency, reduced costs, and faster securities settlement. Likewise, digital ledgers may improve collateral management by improving the tracking of ownership and transactions.
For derivatives, there is interest in the potential for digital ledger protocols to enable self-execution and possibly self-enforcement of contractual clauses, in the context of “smart contracts.”
As we engage with industry and stakeholders to assess the potential applications of digital ledger and related technologies in the payment, clearing, and settlement arena, we will be guided by the principles of efficiency, safety and integrity, and financial stability.
Interoperability was a constant theme at the roundtable and in the above comments:
[D]etermining exactly how the different distributed ledger technologies interoperate with each other, and legacy systems, will be critical. New and highly fragmented “shared systems” may create unintended consequences even as they aim to address problems created by today’s siloed operations. Since distributed ledgers often involve shared databases, it will also be important to effectively manage access rights as information flows back and forth through shared systems. There may well be a tradeoff between the privacy of trading partners and competitors on the one hand, and the ability to leverage shared transactions records for faster and cheaper settlement on the other hand.
Couple this with the proposal this week by Standards Australia to ISO to start work on tech and interop standards.
The speech above also touched on multilateral and bilateral clearing via distributed ledger. Colin Platt of DPactum weighed in with a post this week to describe how things would, and most likely wouldn't, change as the technology evolves:
Smart contracts could embed the logic of what was to be paid and under which circumstances, and more blockchain transactions could facilitate the settlement and highlight whether that had been paid or not. A trusted third party would still be beneficial in calculating how much money needs to be paid to reduce credit risks. Less likely to go would be the more nuanced defaulting role, a central counterparty plays a strong role in ensuring that defaults happen in an orderly manner which causes the least detriment to the market. Also unlikely to be wrapped into a heartless smart contract is the management of systemic risks, not only do these require some amount of discretion but they are largely based on scenarios of events that may or may not play out in the future. In time other technologies may improve our ability to anticipate these scenarios and mitigate their potential impact, but they will almost definitely sit within some centralised structure, even if that structure does speak to a blockchain.
And finally, Bruce Pon of Ascribe wrote about the age of decentralized computing in this LSE Business Review post. The article raises some interesting concepts, especially as a riff on distributed systems being phase two to the internet's phase one, and the LAMP stack comparisons to today's emerging architectures, yet in the end it seems to be a not-so-indirect plug for BigchainDB. But then again, if you don't talk your own book...who will?