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Software & Systems

Blockchain Actors and Audience: Which Are You?

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March 31, 2017

Blockchain tech will have varying impact on the many areas of finance; some must be warier than others.

Blockchain2Weighed down by regulations and outsized capital and reporting requirements, banks have been taking the lead in bringing the efficiencies of blockchain or distributed ledger (or now “chaintech”), to the broader business community, according to a report from Aite. But others are just standing by. The upshot is that the financial industry must be ready to work together and ultimately accept that the technology is here to stay. Meanwhile, corporations, who have mostly been slow to the blockchain party, must get ready to be conversant in the technology as bank partners and vendors begin marketing it.

“Banks are major supporters of chaintech across a variety of use cases, to cut their own middle- and back-office costs and to potentially cut certain fees today paid to intermediaries in areas such as asset servicing and reconciliation,” writes the report’s author, Javier Paz of Aite. To that end they have developed partnerships and been very collaborative with friends and foes alike.

Other parts of the financial world, including buy-side firms, exchanges, financial market utilities, exchanges, regulators and fintech firms themselves, all are similarly affected as chaintech takes hold. And all are responding in different ways.

On the buy-side, things look rather bleak in terms of awareness, outreach or even care. While other industries – including and in particular, aforementioned banks – are creating consortia to tackle the challenges and opportunities of chaintech, there’s very little of this activity for buy-side firms. The Aite reports that a “notable lack of buy-side chaintech engagement is apparent, something that leads us to question the buy-side’s level of preparation and enthusiasm regarding chaintech implementations.” This somewhat indifferent attitude could ultimately backfire, Aite says. “Chaintech-complacent businesses risk becoming the Motorola or Nokia to someone else’s Apple.”

For so-called financial market utilities, that is central counterparties, clearinghouses, and central depositories systems, they become “chaintech implementation casualties or could, if proactive, selectively implement chaintech along with key market participants and embrace the industry’s desire for more efficient middle- and back-office processes.” So far these utilities are taking a cautious approach, selectively using chaintech in some areas. They’re also lauding the benefits but at the same time, pushing regulators to take a more critical eye.

Exchanges, meanwhile, are more engaged in looking at chaintech. However, the new tech is less of a threat, and exchanges can likely adopt whatever clearing and settlement advances others in the financial realm come up with. That said, there are areas where exchanges are looking to leverage blockchain, the Aite report says, including matching and confirmation, corporate actions, pre-initial public offering securities issuance, and proxy voting.

For fintech companies themselves, it is all about either creating “the” platform or being the go-to when it comes to support and other innovations. And this is an area that is seeing most of the consultancy action, with the likes of the Big Four having a big impact; it’s also boosting the bottom lines of big IT outsourcers. It is also here where old-guard companies like Broadridge, IBM, NRI, NTT Data, Thomson Reuters, Rakuten are remaking themselves (or looking to stay relevant).

For regulators, it’s all about, well, regulation. But almost in a more of a benevolent sense, in Aite’s view. Here it seems that regulators have a stake in making sure they don’t take a too stifling an approach, i.e., extending many of the more onerous banking regs to fintechs. They can also foster fintechs to use as weapons against complacency. “Regulators understand that today’s securities settlement system has inefficiencies that perpetuate excess costs on investors/consumers and realize that incumbent market participants (and particularly SIFMUs in monopoly situations) will not willingly adopt cost-saving reforms that could hurt their (the incumbents’) bottom line,” Aite says in its report.

Regulators similarly want to stay ahead of the game, and make sure new technologies aren’t just boldfaced workarounds for existing regs. They also want to make sure they understand the technology and its consequences should something go wrong.

For corporations, uptake has been slow. And corporate treasurers might just be willing to let banks and others lead, given their own resource constraints. Certainly, blockchain’s speed, accessibility and transparency are highly attractive elements for corporate treasurers. But chaintech likely is something that, similar to other activities that fall outside their scope, companies will let others solve and show them the how-tos of application. So, in sense, letting chaintech functionality come to them – in mature and, one would hope, ready-to-use form.

But the new technology is coming nonetheless, and corporate treasurers should be laying the groundwork for acceptance by upper managements. Some C-Suites may be skittish about chaintech, particularly given the Bitcoin experience, which depending on the day, swings from cutting edge product of the future to utter disaster rife with fraud and “dark web” corruption.

“The corporate treasury function is a potential beneficiary of [distributed ledger technology] innovation,” said Mr. Paz. “Thus, corporate treasury would be one of the voices within a cross functional team that would help the C-Suite quantify the benefits and assess DLT fit within that particular use of the technology. The thing with DLT transformation and point-solutions aimed at solving particular challenges (i.e., those of the corporate treasury) is that it is hard to carry out a DLT transformation from that limited vantage point, so the impetus for change resides higher than the treasury function.”

He adds that companies would do well to “consider the full spectrum of DLT platforms” as well as the six adoption choices he describes in the report:
1. Strategic Match of DLT Vendors and Project Type
2. Supporting Other Firms’ Chaintech Efforts
3. Custom Chaintech
4. Acquire Chaintech Intellectual Property
5. Build Your Own Vertical Chaintech Stack
6. Focus on a Business Layer, that is, create a business that chaintech firms see as potential business

In the end, however, Mr. Paz says, “chaintech is not a cure-all type of solution, but it is predicated on collaboration with others, whether that someone else is a corporate peer or a single corporate bringing its supply chain on board its DLT solution. That custom solution could come from DLT consortia or bank-supported DLT implementations.”


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