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Will Blockchain enable Near Real Time Capital Markets Settlement?

Blockchain swan

By Bernard Lunn

Or

OK, you are back at school with a multiple choice question:

A is right

B is right

The Oxford debate rules start with a question. In this case, the question is

“will Blockchain technology enable real time settlement?”

One side proposes a yes answer. The other side proposes a no answer.

A more fun version is what I call the Pooh Corner Debates.

For those who did not grow up with Winnie The Pooh stories, here is the cast of characters:

Most of us in the tech world, especially those with an entrepreneurial mindset, are instinctively more like Tigger than Eyore. Smart Tiggerish entrepreneurs have learned to listen to Eyore. They don’t let Eyore’s negativity stop them. They use the issues that Eyore raises to create their to do list.

First lets hear the base case from Tigger on why a Blockhain based verification (using proof of work cryptography) is better than a trusted third party intermediary (the current model).

We will now let Eyore respond on those two issues:

Tigger interrupts to point out that a Bitcoin based Blockchain is censorship resistant. Eyore putting on his most gloomy voice says “so you expect Banks and Nation States to support a Bitcoin based Blockchain – good luck with that”.

Then hear why the banks, investors and fund/wealth managers want real time settlement. They don’t care whether real time settlement is enabled by Blockchain or by any other technology. They are technology agnostic. Nor do they really care about the fees paid to an intermediary. Sure they like lower fees – who wouldn’t – but the ROI of a big new project based on lower fees looks suspect. No, the big win is not lower fees, it is the elimination of credit risk and market risk by settling in real time.

Lets hear from Eyore on that front:

I am giving Tigger the last word on this debate (disclosure, I tend to agree with Tigger on this one):

Those are tough issues. No doubt about it. This is will need brilliant minds and big budgets. However there is nothing here that approaches physical science limits. We don’t need to go faster than the speed of light to make this work. And the money at stake from eliminating credit risk and market risk by settling in real time is so massive that brilliant minds and big budgets will be applied to the technical issues.

The Bitcoin Blockchain USP is censorship resistance. Censorship aka regulation is a fact of life that business people have to deal with. So it is unlikely that real time capital markets settlement will be built on a Bitcoin Blockchain.

Blockchain without Bitcoin will be amenable to censorship aka regulation. The Blockchain USP is deletion resistance aka immutability.

Of course Blockchain tech has to be as scalable, reliable and fast as current centralized database technology; but that is another story (aka subject of a different Research Note). There are serious questions around this, which is why we use the qualifier Near in Near Real Time Capital Markets Settlement. When we are moving from Settlement that takes 2-3 days, moving to few seconds will still change the game even if tech purists will point out that a few seconds is not real time.

So now you are back at school with your multiple-choice question. Did Tigger or Eyore win you over?

Or

It is possible that there is a third answer. In strategic planning, it is always a question of probability. There is seldom 100% probability. The fancy name for this is Bayesian Statistics. My problem with Bayesian Statistics is that by assigning a number you assign a false sense of certainty. That is what you do with research to tell, where an authoritative body offers something like “XXX says there is 90% probability of yyy”. Investors and entrepreneurs actually work on research to know, where you have a much simpler High, Medium or Low rating; you have just enough certainty to take a next step action but you keep reviewing the probability as new data emerges. Daily Fintech Research Notes fall into the research to know category. So here is our rating:

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

 

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