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The Weekend Read: July 24

1. Blockchain Report Bonanza

If only he had a blockchain

If only he had a blockchain

BoE has been exploring the topic of central bank digital currency (CBDC) for many months. Their report this week focused less on the technical aspects of CBDC in favor of exploring monetary policy implications. In short, would CBDC enable a central bank to perform quantitative easing (QE) directly to 'end users' and individuals? This could help prevent what some claimed happened in past QE episodes, especially during the Euro crisis, where banks were not "passing on" QE to the "real economy." Said another way, blockchains could helps central bankers move beyond indiscriminate helicopter drops and instead deploy drone-like deliveries of QE goodness. Our research team has a much more nuanced review of the paper, so please contact us if you would like to learn more.

This is a very well done and welcomingly brief report that attempts to drag asset managers "off the sidelines" and into the blockchain arena. It is also novel in that it argues for both cost reductions and revenue generation.

Both of these reports serve as a nice review from different perspectives. The EY report highlights opportunity and risk from the perspective of tech companies instead of financial institutions. Couple it with this interview with Microsoft and IBM on their blockchain cloud strategies. The Bain piece reviews the payments opportunity, highlighting the oft-cited correspondent banking opportunity but also bringing into focus the ability to achieve cost savings in trade finance. This is an emerging area of focus for banks and for R3, as there is much room for improvement. This article gives just one example of commodity invoice fraud: "Trade misinvoicing is costing some developing countries two-thirds of the value of certain commodity exports."

Taken together, the four reports show the potential and sketch out some of the challenges, all contributing to answer the "why?" that we hear often from financial institutions. Yet there was another short article that never even mentions "the B word" that answers the why (and why now) question most emphatically: a Reuters piece that highlights "the stubborn costs banks can't erase."

But as time marches on, it's become increasingly difficult to find fat to trim. Long-suffering shareholders have gotten excited about these initiatives only to find they do not move the needle much. Banks are still struggling to meet targets they set, ranging from net interest margins to efficiency ratios and returns on equity.
"It's tough to take out costs meaningfully from here," said Patrick Kaser, a portfolio manager at Brandywine Global who invests in bank stocks.
As a result, bank executives are being forced to fundamentally rethink the way they operate and staff their businesses to make them less expensive – without also limiting the amount of revenue they can produce. As they hold the magnifying glass up to the expense ledger – especially in retail banking – they are finding some costs to be particularly rigid.

2. Ethereum Fork and the Death Throes of Classic

The Ethereum community has moved forward to execute the previously discussed hard fork. Our Tim Swanson weighed in on this earlier in the week in his post Archy and Anarchic Chains:

Perhaps the most controversial [issue] is that simply: there is no such thing as a de jure mainnet whilst using a public blockchain.  The best a cryptocurrency community could inherently achieve is a de facto mainnet.
What does that mean?
Public blockchains such as Bitcoin and Ethereum intentionally lack any ties into the traditional legal infrastructure.  The original designers made it a point to try and make public blockchains extraterritorial and sovereign to the physical world in which we live in.  In other words, public blockchains are anarchic.
As a consequence, lacking ties into legal infrastructure, there is no recognized external authority that can legitimately claim which fork of Bitcoin or Ethereum is the ‘One True Chain.’  Rather it is through the proof-of-work process (or perhaps proof-of-stake in the future) that attempts to attest to which chain is supposed to be the de facto chain.
However, even in this world there is a debate as to whether or not it is the longest chain or the chain with the most work done, that is determines which chain is the legitimate chain and which are the apostates.

Speaking of apostates, it looks like there is a bit of an internecine attack brewing against the "Ethereum Classic" chain. Never a dull moment!

[ed. note: I will be handing over this space to the deep bench of the R3 team through the end of the summer. Enjoy the attacks, forks and twitter battles without me and see everyone after Labor Day]