Peter Randall, chief executive of SETL, said blockchain will be the lingua france of finance in five years as the institutional payment and settlements infrastructure firm has launched its first commercial platform using distributed ledger technology.
Blockchain, which underlies the virtual currency bitcoin, is a distributed ledger that holds transaction records and is shared by a network, rather than being held centrally. Once a transaction is agreed blockchain allows simultaneous exchanges of payments and assets between market participants. The technology has the potential to reduce post-trade expenses, which cost the financial industry an estimated $65bn to $80bn per year, and cut risk and funding requirements.
Randall told Markets Media: “We very strongly suspect that blockchain will be the lingua franca in finance within five years. Blockchain will have the same impact on financial markets and payments as the introduction of standard containers had on world trade.”
Standardised metal containers were invented in the US in 1956 and the subsequent reduction in shipping costs led to a 320% increase in bilateral trade over the first five years and 790% over 20 years according to an academic paper cited by The Economist.
However while bitcoin is a public anonymously shared ledger, SETL is a permissioned distributed ledger which aims to meet the regulatory requirements of financial institutions for settling wholesale transactions, such as the Legal Entity Identifier (LEI) system, a global reference data system that uniquely identifies every legal entity or structure in any jurisdiction that is party to a financial transaction.
Today SETL announced the launch of its blockchain-powered OpenCSD platform which includes a permissioned membership structure; clearing, settlement and corporate actions; liquidity functionality including collateral and repo facilities; and a secure messaging system which can be used to transmit ISO messages as well as enable secure bespoke communications between participants. Customers can access SETL’s API to build apps around their own needs to extend and complement the SETL built-in control functions.
“We have provided the rails, signals and tunnels and customers can decide what type of train they want to run,” said Randall. “We would expect customers to be using their apps within 12 months.”
He added the SETL blockchain technology has been benchmarked to settle billions of transactions a day in real-time. There have been concerns about the scalability of blockchain as the bitcoin blockchain is currently limited to seven transactions per second on a global basis.
He added: “We have solved the engineering problem of running a number of interlinked and communicating blockchains.”
Assets deployed on one chain can be transmitted to others through a ‘witness node’ on the sending and receiving chains, similar to the process of being able to send and receive text messages between phones on different telecom networks.
The SETL OpenCSD platform is available on a subscription basis and the firm expects to take on a limited number of subscribers for the first phase of the roll-out. Randall said the platform had already gained a lot of interest and the initial phase should include a spread of users including asset servicers, clearing and settlement firms, foreign exchange, private equity, trade finance and insurance.
SETL announced plans last July to launch a multi-asset, multi-currency institutional payment and settlements infrastructure based on blockchain technology which can be used for any platform, exchange, currency and asset. Randall was previously the chief executive and founder of Chi-X, the pan-European equities trading venue, which benefited from its first mover advantage. “It was very advantageous for Chi-X to be first,” he added.
Banks, exchanges and clearers have set up their own blockchain and payment initiatives. For example, custodian and asset manager State Street Corporation has set up internal working groups for blockchain while also being part of other consortia, such as R3. Susan Dragan, head of State Street global services offshore, said at a media briefing that the firm also has partnerships with University College Cork in Ireland and Zheijiang University in China for students to work on blockchain applications.
A survey from State Street yesterday found that 57% of asset owners and asset managers expect blockchain to be widely adopted in the investment industry in the next five years, but only 7% currently have initiatives underway to support it. The survey, commissioned by State Street and conducted by Oxford Economics in January, had respondents from 50 asset owners and 50 asset managers from North America, Europe, Middle East and Africa and Asia Pacific.
The survey found that security was cited by 68% of respondents as the biggest concern. The report said: “While cryptography is a core component of the blockchain infrastructure, nine-out of-10 respondents worry about how security implementation in blockchains will address existing and future requirements, an issue that the industry needs to tackle in order for wide-scale adoption.”
Akbar Sheriff, head of regional client management EMEA at State Street, said at a media briefing: “Blockchain is not just a theory and there are cases of it being used in practice today. For example, to record real estate transactions in South America and to record the origin of diamonds and wine.”
Morgan Stanley analysts, Huw van Steenis, head of European financial industry coverage and Betsy Graseck, who covers US large cap banks, said in a recent report that while broad-based adoption of blockchain could take as long as a decade, exchanges, custodian and central depositories should see changes in the next 12-18 months.
The Morgan Stanley Research report, “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”, said the transition is likely to be gradual as applications appear one asset class at a time. The analysts, who work for a big bank, said in the report that change is likely to come from industry consortia such as the Hyperledger Project and the R3 Blockchain Consortium, rather than startups.
“The market may underestimate the opening advantage for banks and custodians,” added Graseck. “If they can deliver a more streamlined process with lower costs, they will be a formidable competitor.”
The Morgan Stanley report identified 10 hurdles for financial institutions to adopting blockchain widely such as the high cost of building a blockchain system and the proposed positive return on invested capital. “The question is, can incumbents achieve increased security, speed, transparency and efficiency using enhancements, blockchain or otherwise, to existing infrastructure,” said Graseck.
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