We have a fairly light news cycle this week (as the industry PR machine takes a breather in between Sibos and Money 20/20), but Techcrunch has helpfully provided a six-part web doc on Bitcoin and Blockchain. The series is based upon Nathaniel Popper's recent book Digital Gold and it walks thru the origins and challenges of Bitcoin, the rise of Ethereum and ends with a chapter featuring R3's Charley "Hollywood" Cooper (your author plays the uncredited role of "offscreen voice trying to crack up Charley Cooper"). It is a really well done series and will jump to the top of my list of "links to send to my Dad to explain what I do for a living."
Speaking of Popper, he has a follow up article to last week's speech by Fed Governor Brainard entitled Central Banks Consider Bitcoin’s Technology, if Not Bitcoin. The article echoes much of what the final Techcrunch episode above discusses, about how the promise of blockchain tech needs to coexist with the realities of the current and future regulatory system:
“There are so many things going on that it is hard to keep track of all the contacts,” said Mr. Berndsen, the head of market infrastructure at the Dutch central bank. “I hear from other central bank colleagues that it is the same everywhere.”
[SNIP] Ms. Wilkins said the Bank of Canada was interested in the technology as a way to build a single, shared record of all the transactions among several institutions. That could leave much less money sitting idle while banks reconcile their different ledgers, as now happens.
It would also create a standardized way of recording transactions that would allow all the players in the system to communicate more seamlessly.
“There is currently a whole industry set up to reconcile and audit all these separate ledgers, and you can’t easily connect them,” she said. “This comprehensive shared data source could be a real benefit.”
This sentiment is also picked up by Currenex's David Newns in this Global Custodian article (thanks for the shout out David!):
“There is a reason banks have the regulatory frameworks around them and in the long run nobody can be immune from those even if you are a technology company and not a bank,” said Newns. “Just because you’re not acting as a bank today, it doesn’t mean that you cannot avoid acting like a bank and it may be less comfortable to start doing so tomorrow. There remains a question over how Wall Street and FinTech get along but FinTechs should be aware that if you want to play in that pool you have to play by the rules.”
“Looking at R3 they have the right mindset and character to bring both of these communities together. The industry needs to think about how FinTechs are going to interact with legacy systems and the cultural divide is being addressed by larger industry initiatives.”
Former UBS CIO Oliver Bussman sprinkles a bit of cold water on blockchain hype with FT article entitled Banks will not adopt blockchain fast (note to FT editors: "blockchain fast"? Aren't the British meant to be more gooder at grammar and usage?):
Over the next 12 to 24 months, I expect we will see significant, if still limited, moves to blockchain-based platforms in areas like cross-border payments or trade finance. But financial services as a whole is much broader than just these isolated use cases. I therefore expect widespread blockchain implementation in other industries first — for example supply chain management, healthcare, real estate, or e-governance.
No doubt financial services will follow; when it comes to blockchain, I do not think you can escape destiny. But the dream of a fully blockchain-enabled financial system will take some time to fulfil.
The Streetwise Professor eschews a sprinkle of cold water for a fire hose of skepticism in this post on the potentially facile arguments and hidden dangers within completely decentralized clearing. He does a very nice job of highlighting the many roles of a CCP above and beyond the blocking and tackling of moving margin, such as mutualizing and managing default and liquidity risk. He also offers this sobering take of smart contracts:
When I think of these “smart contracts” one image that comes to mind is the magic broomsticks in The Sorcerer’s Apprentice. They do EXACTLY what they are commanded to do by the apprentice (coder?): they tote water, and end up toting so much water that a flood ensues. There is no feedback mechanism to get them to stop when the water gets too high. Again, perhaps it is possible to create really, really smart contracts that embed such feedback mechanisms.
But then one has to consider the potential interactions among a dense network of such really, really smart contracts. How do the feedbacks feed back on one another? Simple agent models show that agents operating subject to pre-programmed rules can generate complex, emergent orders when they interact. Sometimes these orders can be quite efficient. Sometimes they can crash and collapse.
In sum, the proposal for “distributed clearing to disintermediate CCPs” illustrates some of the defects of the blockchain movement. It overhypes what it does. It claims to be something new, when really it is a somewhat new way of doing something quite common. It does not necessarily perform these familiar functions better. It does not consider the systemic implications of what it does.
For an antidote to this skepticism, please read Massimo Morini's excellent paper from earlier this year: From “Blockchain hype” to a real business case for Financial Markets
R3 Around the World
To wrap up this week, we are happy to share two "firsts" for R3 and our membership. R3's Rob Sagurton shared this field report from Sao Paulo:
We are often get the question of, "Are historical bank competitors really collaborating positively within R3?" Case in point was the Blockchain Forum in Sao Paulo this week co-sponsored by Itau and Bradesco (together with R3). We were extremely proud to be invited by these two important Bank Members to co-sponsor the first full day Blockchain conference in Latin American specifically focused on DLT for regulated financial markets. The feedback was overwhelmingly positive on both the content and "energy" from the over 125 senior financial executives and regulators in attendance from Brazil and Latin America. Among the esteemed presenters were the Central Bank of Brazil and their Securities and Exchange Commission - CVM, along with R3 Members Emmanuel Aidoo (Credit Suisse) and Carlos Kuchkovsky (BBVA), to whom we owe special gratitude for making the trip to Brazil to provide their valuable global perspective.
And finally, we are very happy to announce our first Russian member Qiwi, the leading Russian payments service provider. Welcome aboard!