Blockchain is one of those buzzwords that is all over the FinTech world. We seem to be at the peak in the hype cycle where blockchain is the panacea to all the financial world’s problems. And some of this hype is justified. There are very good examples where blockchain is already proving its worth. I’m interested in intraday liquidity and where blockchain might help, so I will share the theory and offer my views on what it all could mean.
What is Blockchain all about?
Where to begin? I’m not even going to attempt to walk through the blockchain story. Instead, have a look here (https://www.ubs.com/magazines/innovation/en/our-approach/2016/path-finding.html) and download the white paper. This document, published by UBS, is a comprehensive description of what ‘the blockchain’ is, where it comes from and how it might change the world of Finance.
The important takeaway for the intraday story is this:
- Think of the blockchain as enabling a “shared ledger”, for pretty much anything that you want to keep a joint record of with any third party.
- Rather than both parties having to maintain their own separate records and hoping/trusting they are in sync with each other, you can both see and use the same shared record.
What is the link to Intraday Liquidity?
There are many elements to the intraday challenge but, in really simple terms, the problem stems from not knowing in real-time where your cash and collateral is across all the accounts you hold. Hence, the need for systems to help you understand as quickly as possible what is moving in and out of your accounts.
In theory, if you had a perfect shared ledger with (all of) your account providers, then you would have a perfect up-to-the-second view on exactly where your assets are. So, in a utopian blockchain-enabled world, you would have all the information that you needed for intraday liquidity processes. There is a lot more to be said on how you turn that information into insight to manage the intraday challenges, but we’ll leave that for another day.
So where is the problem then?
Too many blockchains…we need a winner…long time for risk-averse banks to migrate
As always the difficulties come from turning theory into practice. There are four interrelated issues:
- There could be too many blockchains. A major bank, with 100s of agent banks and 1000s of nostro accounts, can’t realistically implement a different blockchain per agent. That’s where the current SWIFT infrastructure works well; a bank can use SWIFT to connect with pretty much all its required agents and many central banks too.
- Inertia to change. There is a well-established global infrastructure today, dominated by SWIFT. It works, is reliable and is plumbed in to the infrastructure of all (or almost all) the parties involved in correspondent banking. It will take a long, long time for risk‑averse banks to migrate away from existing ways of working.
- There are many different parties (technology companies, banks, new consortia) that are prototyping in this space, which is great for innovation. But we need a winner or two. Someone needs to emerge as providing the answer so banks have a clear direction for migrating their current systems, processes and relationships.
- To manage the intraday challenge, you need to bring in a lot of internal information into a bank’s views (e.g. to understand which business units should be allocated the costs of providing liquidity). This internal information is much richer but ‘messier’ than the simplified and consolidated data that ultimately is exchanged with the other parties in the marketplace.
How do we succeed?
Enough of the negativity. Let’s think about how we could evolve to a place where the blockchain and the shared ledgers are delivering what we need.
First, the technology has to have matured to the point where we have thousands of participants exchanging information on millions of transactions. That’s a big leap but technology does develop quickly. At Planixs, we have intraday systems live in banks processing millions of transactions per day and, in our own testing labs, we regularly process tens of millions per hour.
Second, all of ‘this’ needs to be managed in one place i.e. we need a new financial infrastructure whose job is to link up market participants in a safe, secure and stable manner. This infrastructure has to have the 100% trust of financial institutions around the globe. Inevitably, this would replace much of what SWIFT is currently providing through traditional messaging. And, in fact, here is where we find the most likely answer. SWIFT is well placed to become the establishment provider here and, let’s be honest, it faces an existential crisis if it is usurped by another player!
Third, we will need to migrate to the new world. This is a really tricky challenge. Will agents have to bear the costs of providing two alternative delivery mechanisms (i.e. today’s SWIFT messaging protocols plus a new blockchain-enabled shared ledger) so clients can choose when to migrate? Or will SWIFT have to subsidise the new world for a time to encourage adoption? When could we ever turn off the old ‘analogue TV’ world in favour of the new exciting ‘digital TV’ future?
What does all this mean to me?
There’s a lot to ponder on here, so I’ll finish with a seven point plan:
- Keep your eyes on developments around blockchain and intraday liquidity – the possibilities are really exciting.
- Keep watching SWIFT and follow where they are going.
- Be prepared to dip your toe in the water and prototype.
- But try not to be bleeding edge, unless you are prepared to invest time and money in things that may fail. If that’s too painful for you, then be a first follower – leading edge not bleeding edge.
- Don’t sit around waiting for blockchain to solve your current intraday liquidity challenges – you might retire (or be made to retire…) before that happens.
- Remember that a shared ledger will only ever give you information – you need to become really good at turning that information into insight.
- Concentrate on addressing today’s intraday challenge. Our Realiti solution does exactly that and we are already ensuring our technology and applications will work with any consortium that wins out in the blockchain goldrush.