The Weekend Read: Feb 7

Manning after throwing another pick and/or realizing he is long LinkedIn

Manning after throwing another pick and/or realizing he is long LinkedIn

1. Blockchain Report (cont.)

Another week, another distributed ledger report issued by a market incumbent. This time it is Euroclear (along with Oliver Wyman). Due to the sheer number of these reports, it is inevitable that they often tread on common ground. Yet this one does an excellent job of condensing the boilerplate and highlighting some of the key issues faced by challengers and incumbents alike. I quite like their approach of a 'blue sky' picture as a starting point to evoke the ultimate upside of this technology:

The record of each security would be held on a flat accounting basis - that is, with multiple levels of beneficial ownership in a single ledger. There would be no need to operate data normalisation, reconcile internal systems, or agree exposures and obligations. We would have standardised processes and services, shared reference data, standardised processing capabilities (such as reconciliations), near real-time data and improved understanding of counterparty worthiness. For privileged participants such as regulators, we would have transparent data on holdings, among many other improvements.

The report also manages to summarize one nuanced point that I have struggled to make over the last few months: the promise of blockchain tech to unlock certain business models that have previously failed due to the reticence of participants to anoint any one entity with too much political power or data visibility:

In addition, activity around blockchain technology is creating energy for further improvements to the system. A common barrier cited for some innovations is how to agree on a lead provider to hold central responsibility and power in an essentially monopolistic position. Perhaps the only way for the industry as a whole to agree who should develop such solutions is if they all collectively develop and own it together as in the case of blockchain.

The report is worth a read in full.

2. Blockchain How, Hope and Hype

The WSJ has an excellent two-part article in their "CIO Explainer" series title What is Blockchain:

The blockchain architecture allows a distributed network of computers to reach consensus without the need for a central authority or middleman. A good example is in financial services, where trades are often verified by a central clearinghouse that maintains its own central ledger. Using that process, it can take days to settle a transaction, and the clearinghouse typically collects some kind of fee.
Blockchain technology could eliminate that clearinghouse by giving each bank in the network its own copy of the ledger. A common network protocol and consensus mechanism would allow the participants to communicate with one another. Using this method, transactions could be approved automatically in seconds or minutes, significantly cutting costs and boosting efficiency.

Bank of Korea joins the RegTech party by issuing a paper via its Payment Systems Research Team:

"In particular, its technological innovation should be appreciated, since financial service would be provided in an efficient and safe manner without relying on an institution responsible for the processing the information," it reads. However, the paper suggests that, at present, blockchain technology has various shortcomings that hinder its adoption by financial institutions. To circumvent the hurdles, the report said, it is "critical for financial institution, startup companies and government branches to cooperate".

Bitcoin blockchain startup Blockstream announced a $55m Series A funding to bring their total equity funding to $76m. As their head of business development Alex Fowler states in this IB Times article, this war chest is needed in order to survive the upcoming "marathon":

"There's quite a bit of work ahead. We think of this as a marathon not a sprint. Just being able to have the resources to go from proof of concept to production is going to be a critical ability for any of the firms working in this space. That is the reason we went out for additional financing. We look at the magnitude of the challenge and the time required to get there. It is not an overnight change."

Speaking of the long haul, our friend Hu Liang channels his inner Howard Beale with his recent post that attempts to serve as a corrective to the overheated language around blockchain innovation:

How long has banking been around?  Pretty darn long.  And given all the technological changes and transformations throughout human civilization, banks are still around.  Have banks changed?  Of course.  And mostly because they were forced too.  So while banks are indeed slow moving beasts that resist change in order to milk whatever they can, banks are resilient animals that are not going to be “killed” by any single new technology no matter how powerful that technology might initially appear to be.
We are in such early stages of blockchain that I can’t believe people are making such statements.

...and finally, enjoy the Super Bowl, if you can stand the 5 hour long hagiography of Peyton Manning, aka the worst super bowl quarterback in history. But no one enjoys sour grapes! So instead, take under 2:20 for Lady Gaga's national anthem, turn down the sound on the game, and enjoy the party!