No technology has captured the public’s imagination over the past couple of years more than blockchain. While the roots of the technology can be traced back to the 1990s, the actual implementation of the concepts of a distributed ledger began to take flight with the introduction of bitcoin in 2009.
While bitcoin attained something of a taint in the public’s imagination due to its early adoption in criminal enterprises and some highly publicized failures and thefts at early bitcoin companies, the technology underlying bitcoin – digital ledger technology, or blockchain – has taken on a life of its own.
The technology entered full hype-cycle in 2016 (see Maven Wave’s report from the 2016 DTCC blockchain event) but has begun to climb the “slope of engagement” with real progress in 2017. What is the current state of blockchain adoption and what does this promise for the future?
Making a Mark on an Established Market
One of the perceived drawbacks about blockchain is that it would simply take too much time and have too broad of a scope to be efficiently deployed in a market where it would have the greatest impact. In this line of thinking, blockchain has the potential to be highly transformative on a large scale so it therefore must, by definition, be applied where it will have the greatest impact.
One example is the U.S. equities market, where a nearly herculean effort was needed just to move standard settlement from three days (T+3) to two days, a development that won’t even occur until September 2017. Why should we have T+2 when blockchain can conceivably deliver T+0? The simple answer is that blockchain isn’t a magic bullet that can instantly rationalize a complex market that has been developed over decades.
However, there are large, established, institutional markets that are amenable to blockchain technology, and the repo market for U.S.Treasury and agency securities is a perfect example. A repo, or repurchase agreement, is a form of short-term borrowing for financial institutions involved in the government securities market. The market is large, with turnover of more than $3 trillion each day. It also has a major drawback because the initiation of the transaction, or “start leg,” cannot be used to calculate net risk or settlement because the current system has incomplete or inaccurate information for these real-time transactions.
Enter blockchain. If the “start leg” of a transaction can be known and tracked in real time along with the “close leg,” then it will be possible to greatly expand market efficiency by using both legs in the calculation of both settlement and netting of transactions. To do just that, in 2016 the DTCC, the agency that handles the processing of repo, teamed with Digital Asset Holdings (DAH), a blockchain company headed by Blythe Masters, to develop a POC to see if blockchain could feasibly be applied to the repo market.
The successful results of the POC were announced in February, and DTCC and DAH have moved to Phase 2 with a working group to determine whether the solution will work in DTCC’s technology environment and can be integrated with member firms. A decision to proceed is expected in June 2017. A successful implementation will take some time, due to the need for regulatory approval, but promises to deliver immediate benefits to all participants if successful. If DTCC and DAH do proceed, then blockchain will have delivered significant cost savings and efficiencies to the repo market, which will represent a significant milestone in the development of blockchain.
Putting Technology to Use in Creating New Markets
On the other end of the spectrum, blockchain is like any significant new technology in that it can be used to establish or develop a market or product that was previously unavailable or out of reach under old technology regimes. Just as the establishment of the internet spawned the likes of Amazon, Facebook, and Uber, the rise of blockchain promises to open up entirely new possibilities, and one prime example is the New York Interactive Advertising Exchange (NYIAX).
NYIAX will utilize blockchain and the cloud to create an electronic marketplace for advertising inventory. It brings Wall Street to Madison Avenue in the pioneering form of a global exchange that allows publishers and advertisers to buy, sell, and re-trade advertising inventory with standardized terms in a shared interface. NYIAX will initially focus on the digital market, a $72 billion segment, when it is launched later in 2017, with an eye on later expansion to TV, print, radio, and out-of-home markets.
New technology is all fine and well but the ultimate driver of innovation is money, whether in the form of growing a market, generating cost savings through greater transparency and efficiency, or the redistribution of income in the market. NYIAX has the potential to do all three. Increased transparency will lead to better exchange of information and better results for nearly everyone (with the possible exception of the current middlemen), and increased efficiency generally spawns growth.
In choosing a partner to supply the technology platform for their endeavor, NYIAX teamed with Nasdaq, the exchange group that has aggressively pursued blockchain technology. With efforts already underway in the private placement market, share voting, and other areas, Nasdaq is an industry leader in the promulgation of blockchain technology. In that regard, NYIAX looks to be a strong melding of fintech and adtech.
Finding Success with the Establishment
It’s not at all surprising to see blockchain deployed in a new market like digital advertising or even a large and highly regulated market like government securities. It is somewhat more unusual to find a traditionally conservative institution launching a blockchain initiative in an opaque market. Just such an example is seen in Northern Trust’s recent introduction of a blockchain in private equity.
In this effort, Northern Trust teamed with IBM to supply the first commercial deployment of blockchain technology in a private equity fund that is domiciled in Guernsey and managed by Unigestion, a Swiss-based asset manager. Northern Trust is taking a conservative approach to begin with, offering private equity blockchain for only one fund and for a limited number of customers. At the same time, they have taken an aggressive approach in offering a fully functional production system instead of going down the route of first developing a POC and later moving to production. On top of it, the system was developed and deployed in the almost unbelievably short time of six months.
Typically, the private equity process is both time consuming and opaque. The use of blockchain for documentation creates greater transparency and it does so in real time. What’s more, the application of this technology leads to greater security for participants and regulators wind up with better visibility into markets as well. In fact, Northern Trust worked closely with regulators every step of the way, including giving the regulator a view into the blockchain through their own node, in order to ensure full compliance and a smooth path to launch and adoption.
At the end of the day, the fact that a relatively conservative institution such as Northern Trust embraced the latest in technology is a testament to the power and promise of blockchain, particularly when it comes to security and integrity. The quick development and launch of this private equity blockchain demonstrates the flexibility and power of the technology and puts to lie the common held belief that meaningful blockchain adoption may take five or more years to appear. While it will take some time for this experiment to be expanded and for these practices to spread throughout the industry, this successful launch will likely have a profound impact on the pace and scale of blockchain adoption across the market.
The Present and Future for Blockchain
The adoption of any new technology is often difficult to discern in real time and nearly always unpredictable in the path that it takes. However, several general patterns tend to repeat themselves and several key indicators are present in the current state of blockchain.
First, enterprises embark on a “fail fast” phase in which the new technology is applied to many diverse business problems in a classic case of a solution in search of a problem. As a next step, the frivolous or inappropriate use cases are abandoned and substantive existing businesses, such as in the case of repo, and promising green-field opportunities, like digital advertising, are identified and addressed. Finally, mature market participants, such as Northern Trust, adopt and implement the technology in production environments rather than simply through the alphabet soup of POCs and MOUs. As in the case of Northern Trust in private equity, these production efforts often start small but the fact that they are “real” leads to faster learning and evolution of effort.
Like a snowball on a hillside, such efforts typically grow quickly in terms of both size and speed. The trick is to learn how to ride the avalanche – unless you want to be run over, that is.