De-Mystifying Blockchain

Speakers at Profit & Loss’ Forex Network London tried to “de-mystify” blockchain technology as they talked about its practical applications within the financial services industry.

Andy Coyne, CEO of Cobalt DL, explained that when he first began looking at how blockchain technology could be applied to post-trade FX he found that there was a lot of noise and hype around the technology, but that there was a dearth of companies actually ready to implement it in a practical manner.

Coyne said that he looked at the issue that his firm was trying to solve, which was how to reduce cost and risk in post-trade processes, and then started examining if and how this technology could help.

“So we reversed the issue, it wasn’t a blockchain looking for a solution, it was the other way round, it was a problem looking for a solution, the question was: did distributive ledgers solve it?” he said.

Coyne argued that the scientific applications for this technology can sometimes complicate its actual use, emphasising that the value that it brings within Cobalt’s offering is as a piece of shared infrastructure.

“It’s not blockchain, it’s a shared distributed ledger, it’s a shared infrastructure and what we’re using it for is to record FX transactions once, and once only, to become the golden record of a transaction and from there you start to deliver a ton of efficiencies,” he said.

Similarly, Adam Furgal, director, incubator and accelerator at R3, said that when his firm built Corda – a distributed ledger platform designed specifically for and by financial services firms – it had to first ask some hard questions about where the actual business case for this technology exist.

“It’s not about blockchain, it’s not about building an unstoppable computer, it’s not about censorship resistant cash, but it’s inspired by all of those things to solve the real challenges of the regulated financial services sector” he said.

Furgal later added: “We didn’t set out to build a new platform, we didn’t set out to build Corda. We set out to investigate what an open distributed ledger platform would look like for financial services. We ran a series of quite intensive architectural discussions looking at privacy requirements, looking at non-functional requirements, looking at performance, looking at regulatory concerns, looking at legal and audit frameworks and asking some hard questions about all of the existing platforms in the market.

“From that we started forming opinions and we started prototyping Corda and based upon the progression of that and the progression of Corda the simple answer was, yes, there is something new about this technology and, no, nothing on the market met the need of regulated financial services.”

With the Corda platform now open source, Furgal explained that banks, software vendors and FinTech startups are building commercial opportunities on top of it, estimating that about 80% of R3’s consortium members would highlight cash and payments, trade finance, know your customer (KYC) and FX as the top four areas where they see the most immediate potential for DLT solutions.

Discussing the challenges involved in moving from a theoretical DLT service to actually offering a live one that works, Coyne claimed that domain expertise is important. This is because, he said, DLT service providers need to understand how the market that they plan to work within currently operates, understand the workflows from the different participants, be able to simplify their existing operations using the technology and run it in parallel with firms’ existing infrastructure.

“What’s surprising is that it isn’t such a big lift,” he added. “We want to really de-mystify the whole blockchain thing, we don’t use the word “blockchain”, it’s a shared distributed ledger, it’s a private one, it’s a market infrastructure that is shared rather than running their own.”

Coyne said that for firms that need to process FX trades in a normalised way, but don’t compete on how they process these trades, then shared ledgers are the most cost effective method of doing this. 

“The benefits are huge, when you think about what the market today spends on this infrastructure it’s tens of billions of dollars, that’s the prize,” he said.

You can watch the full interview of the discussion here:

Galen Stops

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