Will investment banks institute a meaningful blockchain?

by on December 9, 2015 at 12:59 pm in Current Affairs, Economics, Law, Web/Tech | Permalink

I’ve been saying “no, not really” for a while now. Here is a good Philip Stafford FT story on the question, excerpt:

With an internal blockchain “all you’ve done is set up an interbank liability”, says Peter Randall, chief executive of Setl, a UK blockchain start-up, and the former head of the Chi-X Europe share trading venue. “True settlement is where you never have to see the other party again. Settlement can only take place in central bank money.”

Any such system would have to be grafted on to banks’ existing IT and payment systems, some of which have been in place for decades, and meet the requirements of market watchdogs. Regulatory issues include anti-money laundering and trade reporting laws.

“In theory it could bring benefits,” says Mr Swanson. “But if we’re not rigorous in issues like switching costs and all the ‘boring stuff’, it won’t go anywhere.”

Many in the industry say expectations are too high, and favour a long-term, phased approach to putting asset classes on the blockchain. It could start with central bank transfers in the payments system and then move on to settlement of various types of security.

And this:

“In terms of total R&D at banks, it’s a drop in the ocean,” says Virginie O’Shea, an analyst at Aite. “They don’t see it as going to revolutionise their business. It’s more speculative than anything. Blockchain is this year’s ‘big data’.”

I’m going to stick with my prediction.

1 rayward December 9, 2015 at 1:27 pm

I think a better description is daisy chain.

2 Norman Pfyster December 9, 2015 at 2:02 pm

I guess the question is whether the blockchain technology can be uncoupled from the currency part.

3 mikez December 10, 2015 at 6:58 am

Can you have blockchains where validators and block makers are rewarded in something other than native tokens or fees denominated in native tokens? Yes, but the security model is broken. Trust is assumed from the outset (a terrible assumption when you think about it) and in virtually all cases the “reward” for private chain participants is merely a working system or the threat of fines or other legal recourse — history tells us these are not compelling incentives! This makes for a vastly less secure chain (indeed we have yet to see examples of private chains in the wild, let alone proven examples) and prompts a raft of new, unanswered questions around organisation, administration and liability.

That said, private chains can (assuming they remain secure and operate as expected) replicate some of the behaviours of digital bearer assets (i.e. assets controlled absolutely by their holders — the purest form being bitcoins). That means experimentation with smart contracts is possible. Having the ability to control assets with computer code promises all sorts of new and novel transactions and structures with huge efficiency gains. I have to imagine that a digital bearer asset form of central bank money will one day exist for this purpose (BoE crypto-treasuries, perhaps?).

If banks could move beyond the “know-your-validator” / “know-your-miner” sticking point (which in my mind is overblown, even for highly regulated and very conservative bank entities), innovation could accelerate dramatically. Of course, public chains would need to mature too — Bitcoin is not ready for prime time either, and Ethereum even less so, but they do have the greatest potential and they will become increasingly difficult to ignore.

4 Max December 9, 2015 at 2:28 pm

Did you see Australia potentially raided Satoshi’s house?

5 Pv December 9, 2015 at 2:48 pm

This quote:

“In terms of total R&D at banks, it’s a drop in the ocean,” says Virginie O’Shea, an analyst at Aite. “They don’t see it as going to revolutionise their business. It’s more speculative than anything. Blockchain is this year’s ‘big data’.”

is classic disruption-innovation-as-toy thinking.

6 Brad December 9, 2015 at 2:58 pm

With limited, known participants a blockchain is just an baroquely expensive (computationally speaking) shared ledger. There’s no good reason for banks to use it between themselves. If a group of banks say they are going to they are either fools or have an ulterior motive (or both).

7 Brian December 9, 2015 at 3:28 pm

Came to post this. +1

Only thing to add is that the ulterior motive may not even be rent capture. This is the kind of sexy sounding vanity project you publicize to get technical people talking about your firm. Anything that attracts talent!

8 Anon. December 9, 2015 at 6:31 pm

Can’t you vary the computational expense at will when you control the blockchain?

9 No. December 9, 2015 at 6:52 pm

In a word, no. You can set a difficulty parameter for “mining” new currency and there are various ways to make attacks on the ledger more difficult, but the bottom line is that the community needs enough computational power to maintain control of the ledger vis a vis a malicious attacker. Either that or they have to place greater trust in certain parties, making the ledger no longer truly distributed.

10 Anon. December 10, 2015 at 12:34 pm

The only participants would be a few big banks though, I don’t think trust is an issue.

11 Brad December 10, 2015 at 12:48 pm

That’s why you don’t need a blockchain. And if you take out the computationally expensive parts you don’t have a blockchain.

12 Stable medium of exchange December 9, 2015 at 5:49 pm

The main value would be for any bank that could effectively allow people without named accounts at the bank to still trade on the internal bank ledger. If a bank could credibly issue a cryptocurrency pegged to dollar deposits (or some other major currency) then deposits in the bank would increase over the long run as the deposit backed cryptocurrency displaced bitcoin as the primary cryptographic medium of exchange, i.e. drug dealers would prefer a more stable cryptographic medium of exchange. It seems like Overstock.com may have beat the banks to it though: https://bitcoinmagazine.com/articles/sec-approves-overstock-com-s-filing-to-issue-shares-using-bitcoin-blockchain-1449539558

13 dux.ie December 9, 2015 at 7:19 pm

The question is will the banks willing to give up control of the blockchains ?

If not, then they will essentially be notary services which can be implemented with very much less energy costs.

14 bjk December 9, 2015 at 8:18 pm

Why not run some pink sheet/penny stocks using blockchain. Have some bitcoin companies issue share on a bitcoin stock exchange so traders can get used to it. Then semilegit companies can use the bitcoin exchange to go public. Lots of innovations bubble up from areas that are disreputable. It’s not like penny stock investors are that worried about losing their money.

15 mikez December 10, 2015 at 5:26 am

This kind of innovation is happening, just not with banks at the helm — look at Overstock’s T0 (with recent SEC approval) and Nasdaq’s experiments. Also worth considering the various coloured coin protocols that exist already and have been used for (less legit) issuances for years.

16 mikez December 10, 2015 at 7:09 am

“True settlement is where you never have to see the other party again. Settlement can only take place in central bank money [or bitcoins].”

^ Not wishing to sound like an evangelist, but this sentence deserves mention of Bitcoin. Once confidential transactions are possible, this will be normal.

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