Latest posts by Emily Potter (see all)
Finbuzz attended a roundtable discussion at DLA Piper in London on blockchain technology.
Prior to the panel discussion, Dr. Kay Swinburne, a policy maker and member of the European Parliament for Wales, gave a keynote speech about the discussion around blockchain at the European Union (EU). She stressed the importance of creating a future regulatory framework that will facilitate the technology, and not just regulate it. She discussed how blockchain, also referred to as distributed ledger technology, has huge potential for bringing change to the financial services sector from clearing, to settlements, to collateral management, to central banks.
Swinburne: The Financial Conduct Authority has to create regulation for the new technology that can be applied without stifling it.
The Financial Conduct Authority (FCA) in London, Swinburne said, has a similar aim as the EU to create regulation for the new technology that can be applied without stifling it. Both have been making an effort to understand the technology rather than simply ban it. She closed her speech by stressing the point that, although blockchain appears to have the potential to revolutionise the financial services sector, it will need to prove its value case by case before it is fully embraced and its various range of uses are fully realised.
Following Swinburne’s speech, Dr. Nicolette Kost de Sevres, a senior policy advisor at DLA Piper, opened the panel discussion with a quote from Klaus Schwab’s The Fourth Industrial Revolution. In the book it was cited that 60% of world leaders agreed with the statement that 10% of global GDP would be stored on blockchain by 2025.
Kost de Sevres: 10% of global GDP would be stored on blockchain by 2025
Sevres then asked the panel where they see blockchain technology five or ten years from now. First to respond was Dr. Hossein Kakavand, the panel’s “technical” and CEO of Luther Systems. Kakavand said in the future the varying implementations of blockchain need to communicate. He envisions a “blockchain of blockchains”, where the various different blocks can communicate through an information backbone and transact with each other.
Clive Ansell, head of market infrastructure and technology at the International Swaps and Derivatives Association (ISDA), said that blockchain is something he has only recently been exposed to in September 2015, and even in that time frame it has seemed to gain more momentum.
Ansell said that while the technology has huge potential, in whatever way it is ultimately used, it must be built in a strong and sustainable way. Siobhan Cleary, head of research and public policy at the World Federation of Exchanges (WFE), said she thinks that in the future blockchain technology will be both more and less pervasive than we think, and that predicting where the technology will be in five years is impossible because its potential uses are not even conceivable to us at the moment.
Ansell: blockchain must be built in a strong and sustainable way
Discussing its future potential is all well and good, but “what is the blockchain?” Sevres asked. To answer this question she turned to Kakavand.
Blockchain, he explained, began with the digital currency BitCoin. In BitCoin there were two parallel streams; one was the digital currency itself, the other was the blockchain technology behind it. Blockchain, a distributed ledger technology, is a digital platform that records and verifies the history of transactions in near real time. It is a network of computers, called nodes. The basic notion behind it, explained by Kakavand, is that a node will broadcast its transaction across the entire network and authenticate it. It will then propose a block of information related to this transaction, which will be authenticated by the other nodes. This block will then be attached to the most recent block preceding it, hence a blockchain. Everything is conducted and authenticated near real time, creating an incorruptible database. When applied to financial transactions, blockchain would authenticate transactions near real time, which will reduce the need for reconciliation, therefore increasing speed and efficiency.
Kakavand: Everything is conducted and authenticated near real time, creating an incorruptible database.
With this understanding, Sevres asked Cleary of WFE what the advantages of blockchain are for exchanges. Clearly said inherent to blockchain are the advantages brought about by having a near real-time speed of transactions, which has the potential to reduce processing costs, as well as duplication and the possibility for errors. She says it also has the potential to revolutionise the post-trade space.
Cleary said, “latency is the name of the game”, or in other words, the reduction in delays which blockchain technology will bring about will be one of its primary advantages. However, she once again emphasized that we still have not even begun to tap into an understanding of all this technology’s potential, and as we begin to understand and apply it further, new opportunities will emerge.
To end the panel discussion, , a financial lawyer at partner at DLA Piper, discussed what he believes will be some of the legal challenges and benefits of blockchain. He said the legal challenges would revolve around the fact that there will be no clear reference point to which they can hold someone accountable, as the ledger itself cannot be a reference point. Will it be where the asset is held? Will it be who created the technology? Who, he stressed, is going to be held accountable? But he said one of the major benefits of blockchain technology would be the reduction in the possibility for human error, because transacting with blockchain will not rely on human interaction. “How much error in finance is due to human error?” he asked. He again also emphasised the speed of transacting as a benefit due to the costs savings that will come about as a result.
Bartlam: How much error in finance is due to human error?
To close the event, Former US Trading Honorable Commissioner Bart Chilton gave a speech to the audience. He began by saying when it comes to blockchain there are two different groups. There are those that are enthusiastic about the technology, and those of the “old guard” who are sceptical and concerned about the anti-money laundering, drug dealing and human trafficking uses that are often associated with BitCoin and other virtual currencies. Chilton said he began as a sceptic, but grew to be an enthusiast.
Like many of the other speakers and panellists that morning, Chilton cited blockchain’s comparison to the Internet, and then proceeded to make another parallel comparison to high frequency trading (HFT). He discussed how when HFT technology first came about it was unknown and unregulated, and therefore feared, yet today it has become a market maker and represents 50% of markets.
Chilton: blockchain may revolutionise not just finance, but also other industries like healthcare as well as politics through e-voting.
Bringing the discussion back to blockchain, Chilton said that as far as comparisons go to understand the disruptive potential of blockchain, HFT is likely too small of a bowl whereas the Internet is likely too big a bowl, but the point remains that with both HFT and the Internet, if we had allowed our fear of change to dictate our decisions we would not have realised the full potential of those technologies. Change is scary, said Chilton, but if the government works to create a space where the technology can take off, the changes it can bring about are truly exciting. Chilton discussed the potential for blockchain to revolutionise not just finance, but also other industries like healthcare as well as politics through e-voting.
These changes, however, can only be brought about if we are pro-active and continue to have conversations, like the one that took place at DLA Piper, to help us understand the technology and create a regulatory environment that fosters the growth of blockchain.