WSBA’s Quaranta: Education is Key to Unlocking Blockchain Adoption

It seems that just about everywhere one looks these days, blockchain and distributed-ledger technology is there staring back at us. And for good reason: If the really smart guys on Wall Street and in the City are to be believed, distributed-ledger technology has the potential to transform a number of business processes that together comprise how the capital markets operate at the most fundamental level.

Clearing and settlement functions are, according to the technologies' proponents, ripe for transformation, although industry participants will need to exercise patience, given that it is unlikely that anything substantial ─ that is to say the emergence of blockchain or other distributed-ledger technology-based platforms in live, production environments ─ will transpire before the end of 2016 or possibly even later.

The Wall Street Blockchain Alliance (WSBA), formed a little less than a year ago to promote the development and roll-out of distributed-ledger technologies across the capital markets, has until now been "running fairly quietly," according to Ron Quaranta, chairman of the WSBA and CEO of Digital Currency Labs. Quaranta explains that the WSBA was formed as a 501 (c) (6) trade association (a non-profit organization), with the goal of assisting members to become the voice of the industry in the blockchain and distributed-ledger world. "Our board and members come out of financial services firms and a lot of the technology conversations I had at senior levels were around becoming an organization like the Securities Industry and Financial Markets Association (Sifma) for blockchain," Quaranta says. "Soon we will launch our certification program, a platform for members of financial services organizations to understand what the future of the marketplace looks like at technology, business, product, and strategy levels from a distributed-ledger perspective."

Use-cases
The question on many people's lips right now with respect to distributed-ledger technology and its position in the fintech landscape is how it can be applied to well-defined, mature business processes. To date, most of the speculation has been around clearing and settlement functions, business processes that are pivotal to the healthy functioning of the trading lifecycle, but which do not provide user-firms with a competitive advantage. "The default is to automatically go to the existing use-cases and proofs of concept, but I'd like to go a bit beyond that," Quaranta says. "Everyone has spoken about clearing and settlement and I suspect that the first successes will be around the low-hanging fruit. So we'll see clearing and settlement and in the trade finance space, we'll certainly see the disintermediation of the paper letters of credit with distributed-ledger technology."

However, Quaranta argues that data entitlement might be similarly touched, effectively streamlining the dissemination of data and ensuring that only those who pay for specific data services ─ most notably reference data feeds ─ are able to access them. "I would argue that over time we will start to see distributed ledgers seep much more into the fundamentals of the capital markets. For example, we know that data powers the financial markets and all of that data from exchanges, analytics providers and fintech vendors is based on entitlement. If I'm buying NYSE data, I might get it from Thomson Reuters along with CBOE market data. All of that is a clunky, friction-filled, and sometimes paper-intensive process. We're currently collaborating with colleagues in this space and we're re-writing how reference data is shared across capital markets, and the entitlement that powers that process can be managed by distributed-ledger technology."

So when we remove the need for an intermediary to cover all those bases, we're looking at a world where the trade is the settlement and in that context, counterparty risk will essentially be zero." ─ Ron Quaranta, chairman of the WSBA.

The Fundamentals
One of the technology's primary challenges to its widespread adoption across the capital markets is that large numbers of industry practitioners are still unclear as to what exactly it does, how it works, and crucially, how it can be applied to existing business processes and by so doing enhancing and streamlining them. Quaranta's explanation of the how and the why is simple: "Clearing and settlement is based on the premise that we need an intermediary to be the arbiter of a transaction between two parties ─ I sold an equity, you bought the equity, but I don't know you particularly, and in a trustless world, I need someone who I can trust," he explains.

"That's the fundamental premise of clearing and settlement: minimization of counterparty risk and the ability to settle ownership and the transfer of underlying assets. In the distributed-ledger world, the transfer of title and value actually lies within the transaction itself. For example, if I create a platform for clearing and settlement and you buy a security, I cannot transfer the title or value of that security to you unless the distributed-ledger platform has confirmed four things: that I have it [the security]; that you've received it; that you have the money to pay for it; and that I have gotten the money for it. So when we remove the need for an intermediary to cover all those bases, we're looking at a world where the trade is the settlement and in that context, counterparty risk will essentially be zero."

Challenges
While the adoption of blockchain and distributed-ledger technology by capital markets firms has been glacially slow, neither technology is new. Firms have been tinkering with the technology for the best part of a year now and yet still there are no use-cases in live, production environments. Yes, there are proofs of concept and "tests," but the industry is still watching and waiting for the technology's first genuine roll-out to support an existing business process.
When quizzed about the challenges facing distributed-ledger technology and its adoption, Quaranta is clear: "There are two, the most significant being what I call the education curve," he says. "Blockchain and distributed-ledger technology are starting to permeate larger parts of the financial market, but still the vast majority of financial markets participants, including the highest levels of management, do not fundamentally understand what distributed-ledger technology is, and more importantly, how it is making us reevaluate what we do. The second is a corollary of the first: Even in the technology space, there is simply not enough educated and informed technology talent to be leveraged within capital markets firms to actually code up distributed-ledger technology in a production-ready way. Education, even at the technology level, needs to increase."

As Things Stand
Nasdaq started the distributed-ledger ball rolling when on New Year's Eve last year, it executed a private securities transaction via its distributed-ledger-based Linq platform. The Depository Trust & Clearing Corp. (DTCC) and Digital Asset Holdings, a New York-based provider of distributed, encrypted straight-through processing tools, followed suit at the end of March this year, when they announced an alliance that would allow the pair to develop a distributed ledger-based platform to manage the clearing and settlement of US treasury, agency, and mortgage-backed repo transactions. According to the DTCC, it will work with Digital Asset to incorporate structured, cryptographic ledger entries into existing securities trade and settlement flows, demonstrating how capital markets firms will be able to create and interact with a ledger of obligations and positions that evidence matched securities transactions, including normal trading activity and repo agreements.

A week after the DTCC-Digital Asset alliance was announced, seven firms ─ Bank of America Merrill Lynch, Citi, Credit Suisse, JPMorgan, the DTCC, Markit, and Axoni, a New York-based provider of blockchain technology to the capital markets ─ announced that they had successfully used blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single name credit default swaps (CDSs). According to a Markit press release, the month-long project saw the group establish a blockchain trade-processing network across a blend of hosted and locally-installed deployments of Axoni software. In the test, Markit generated smart contracts from CDS trade confirmations sourced from MarkitSERV, the firm's OTC trade processing and workflow platform, creating what it describes as a "synchronized, distributed golden record on the network." Embedded in those smart contracts were economic terms, as well as computational logic to manage permissions and event processing.

R3's Emergence
Also in April, R3 ─ founded in September 2015 by a consortium of nine banks (which has since swelled in number to 43) ─ released Corda, a distributed ledger platform designed to manage financial agreements between regulated financial institutions, while later that month Barclays unveiled its Smart Contract Templates platform, underpinned by Corda, at the bank's Barclays Accelerator event at the O2 arena in London.
Clearly, distributed-ledger technology has legs in this industry ─ too many of the industry's largest players are actively assessing the technology for it not to have multiple applications in the capital markets. And while it appears that clearing and settlement are particularly well suited to be underpinned, streamlined and enhanced by the technology, what is less clear is the extent to which it might permeate other existing processes.

The Bottom Line:
There is little doubt that blockchain and distributed-ledger technology has the potential to revolutionize certain aspects of the capital markets, most notably clearing and settlement and the processing of smart contracts, although it might be some time before the industry sees applications built on the technology in a production environment. Proofs of concept and one-off tests are one thing, but deploying a new technology to support live, mission-critical business functions, is another.