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Blockchain is one of those buzzwords that is all over the FinTech world. We seem to be at the peak in the hype cycle where blockchain is the panacea to all the financial world’s problems. And some of this hype is justified. There are very good examples where blockchain is already proving its worth. I’m interested in intraday liquidity and where blockchain might help, so I will share the theory and offer my views on what it all could mean.
Where to begin? I’m not even going to attempt to walk through the blockchain story. Instead, have a look here (https://www.ubs.com/magazines/innovation/en/our-approach/2016/path-finding.html) and download the white paper. This document, published by UBS, is a comprehensive description of what ‘the blockchain’ is, where it comes from and how it mightchange the world of Finance.
The important takeaway for the intraday story is this:
There are many elements to the intraday challenge but, in really simple terms, the problem stems from not knowing in real-time where your cash and collateral is across all the accounts you hold. Hence, the need for systems to help you understand as quickly as possible what is moving in and out of your accounts.
In theory, if you had a perfect shared ledger with (all of) your account providers, then you would have a perfect up-to-the-second view on exactly where your assets are. So, in a utopian blockchain-enabled world, you would have all the information that you needed for intraday liquidity processes. There is a lot more to be said on how you turn that information into insight to manage the intraday challenges, but we’ll leave that for another day.
Too many blockchains…we need a winner…long time for risk-averse banks to migrate
As always the difficulties come from turning theory into practice. There are four interrelated issues:
Enough of the negativity. Let’s think about how we could evolve to a place where the blockchain and the shared ledgers are delivering what we need.
First, the technology has to have matured to the point where we have thousands of participants exchanging information on millions of transactions. That’s a big leap but technology does develop quickly. At Planixs, we have intraday systems live in banks processing millions of transactions per day and, in our own testing labs, we regularly process tens of millions per hour.
Second, all of ‘this’ needs to be managed in one place i.e. we need a new financial infrastructure whose job is to link up market participants in a safe, secure and stable manner. This infrastructure has to have the 100% trust of financial institutions around the globe. Inevitably, this would replace much of what SWIFT is currently providing through traditional messaging. And, in fact, here is where we find the most likely answer. SWIFT is well placed to become the establishment provider here and, let’s be honest, it faces an existential crisis if it is usurped by another player!
Third, we will need to migrate to the new world. This is a really tricky challenge. Will agents have to bear the costs of providing two alternative delivery mechanisms (i.e. today’s SWIFT messaging protocols plus a new blockchain-enabled shared ledger) so clients can choose when to migrate? Or will SWIFT have to subsidise the new world for a time to encourage adoption? When could we ever turn off the old ‘analogue TV’ world in favour of the new exciting ‘digital TV’ future?
There’s a lot to ponder on here, so I’ll finish with a seven point plan: