“It’s not just hype,
we’re in a perfect hype storm,” said Lee Braine from the investment bank CTO
office at Barclays at the 2016 Blockchain Symposium hosted by the Depository
Trust & Clearing Corporation (DTCC) in New York on Wednesday.
He was, of course,
referring to the level of excitement that has accompanied the introduction of
distributed ledger technology to the financial services industry.
Evidence of this
‘perfect hype storm’ can be found everywhere. Every day emails fill up inboxes
with details of the newest distributed ledger or blockchain vendor to enter the
market touting a variety of different uses for the technology within the financial
Then there’s the
smorgasbord of various seminars, webinars, panels, conferences, regulatory
hearings and, apparently, symposiums, being organised to discuss the technology
and what it might mean for financial services.
Meanwhile PR machines
are whirling into overdrive on this topic. Just this month R3 CEV announced
that it had completed
a trial of five cloud-based emerging blockchain technologies with 40 bank
consortium members, while Icap also announced that it had completed a test
to create a private,
peer-to-peer, distributed ledger network using smart contracts.
On Wednesday DTCC and
Digital Asset Holdings announced plans to test distributed ledger technology
for repo transactions.
Now while the
comments made by Digital Asset CEO, Blythe Masters, and DTCC to Profit & Loss about the
challenges of building out a proof of concept using this technology make
for interesting reading, the reality is that the first stage of conceptually
working out if a new technology is appropriate for a given function would not
be considered newsworthy were distributed ledger technology not involved.
Clearly, the press is culpable in helping to create this hype storm.
Given all the hype
that has surrounded this technology, and the myriad of potential use cases that
it has been put forward as a solution for, it was therefore gratifying to hear
some of the speakers at DTCC’s Blockchain Symposium clearly refute some of
these use cases.
“The idea that
reconciliation goes away – I think that’s a myth,” said Robert Palatnick,
managing director, chief technology architect at DTCC. “No matter how you slice
it there are other systems, whether they’re big data systems, whether it’s new
trading systems, whether its bigger and better end-ledgers, there will always
be reconciliation to get things on the ledger and off the ledger.”
Palatnick also argued
against the claim that T0 or immediate settlement is the ultimate benefit of
distributed ledger technology.
“Some use cases imply
that near real-time settlement can occur, but is that always desirable? It
probably depends on the business case. I think that the idea that you can share
information in real time is the ultimate value of the technology and that
sometimes gets lost in the hype,” he said.
Palatnick then took
aim at the idea that a ledger of transactions can solve all the computing
solutions that a company needs.
“That is completely
untrue,” he commented. “Sometimes what gets lost in this conversation is that
this technology is just a ledger of transactions.”
misconceptions regarding distributed ledger technology that Palatnick chose to
refute were that firms are happy for every transaction they do to be put onto a
public ledger and the idea that public “untrusted” networks are inevitably
better than private ones based on trust.
David Rutter, CEO of
R3, agreed that there has been a lot of hype around the technology, attributing
much of this to the state of the financial services industry financial
“It’s easy to get
hyped up in our industry because we’re under incredible cost pressures, we’re
looking to save capital in any way that we can,” he said.
Rutter added that
when he was initially introduced to the technology there were many claims that
it would replace market infrastructure providers such as DTCC or CLS, claims
which he said he has never believed to be true.
Competition Vs. Collaboration
When considering the
hype surrounding distributed ledger technology it was also refreshing to hear
Adam Ludwin, co-founder and CEO of Chain.com, pour cold water over the constant
comparisons to investments in the Internet during the 1990s.
Over the past year
this has been everyone’s go-to analogy when advocating the potential impact of
Blockchain but, however integral the technology becomes to the financial
services industry, it is hard to see it replicating the impact of the Internet.
“I think it’s very
dangerous to compare anything to the Internet, I think it was a one off
phenomenon that will probably not be repeated in our lifetime,” said Ludwin.
He made another good
point when calling out some of the demonstrations of collaboration between what
are ostensibly competing distributed ledger technology vendors and financial
services firms as “a bit disingenuous”.
Throughout the day
there was a lot of talk about cooperation amongst different firms with regards
to this technology and constant references to the collaborative Hyperledger Project,
but the reality is that this is a competitive market an inevitably there will
be winners and losers amongst both providers and users of distributed ledger
Therefore it is
probably prudent to maintain a certain level of skepticism regarding all the
announced collaborative efforts taking place. Or as Ludwin put it: “It’s a lot
quicker to write a press release than it is to write a line of software”.
Elsewhere in the
market, what many call “hype” is often translated into concern for regulators
who are trying to stay on top of this rapidly evolving technology. So while
there may be plenty of excitement for distributed ledger technology, there is
the possibility that the speed at which it can be implemented, especially within
systemically important financial institutions, may be limited by regulators.
Giancarlo, a Commissioner at the Commodity Futures Trading Commission (CFTC),
acknowledged this in his address to the symposium on Wednesday, stating that
the development of distributed ledger technology “is at risk of being stymied
by disparate and uncertain regulation”.
He argued that both
US and foreign regulators need to adopt a harmonised, coordinated and
principles-based approach to regulating this technology. But if the experience
of the swaps market is anything to go by, this could be a lot easier said than
And lastly, at
Wednesday’s symposium it was still hard to escape the feeling that distributed
ledger technology is still, to a certain extent, a solution looking for a
problem to fix.
More than one speaker
at the event made the comparison of having a hammer and looking for things to
nail, meanwhile the audience voted that the business case and cost of
integration is going to be the biggest challenge for implementing Blockchain
“I think that it is
too early generally speaking to be investing in Blockchain, I think that the
use cases are too far and few between and this industry is incredibly slow to
change and adapt,” claimed Barry Silbert, founder and CEO of the Digital
Currency Group. It should be noted though that Silbert appears to have put all
his eggs (or in Silbert’s case, wads of cash) in the digital currency basket
rather than the Blockchain one, and tended to argue accordingly.
However, although the
practical applications for distributed ledger technology currently remain
largely theoretical, bar the exception of transferring money, this should not
diminish the long-term value and potential applications of the technology.
The overall mood of
the conference was very upbeat, and although some of the speakers rightfully
tried to outline some of the limitations and headwinds for the implementation
of distributed ledger technology in order to help the audience navigate this
“hype storm”, they were very bullish on the potential applications of this
technology within financial services.
Blythe Masters, CEO
of Digital Asset Holdings – who
incidentally refuted the idea that distributed ledger technology is a solution
looking for a problem in an interview with Profit
& Loss earlier this week – predicted at the event that it would
take five to 10 years for this technology to become a mainstream part of the
financial services industry. This feels like an accurate time horizon right
Ultimately, it’s hard
not to be bullish on the prospects of distributed ledger technology given the
obvious theoretical benefits that it could provider, as well as the financial
resources and talent that is being attracted to this space.
Giancarlo stated at
the Symposium that distributed ledger technology has the potential to “revolutionise
the world of finance” by “increasing settlement efficiency and speed, linking
recordkeeping networks, reducing transaction costs and increasing market
However, as market
participants continue to seek the much-vaunted “killer app” for this technology
it is also important to acknowledge where improvements can be made to the
financial markets ecosystem without distributed ledgers.
Having a realistic
timeline is also important and, if Masters is correct in her prediction, it
will be interesting to see what the competitive landscape is like when this
technology sees mainstream adoption and which firms manage to weather the hype
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