That is why the Blockchain session at SIBOS Singapore last year was standing room only and at SIBOS Geneva next week I counted 10 sessions with Blockchain as the primary theme (it will probably be mentioned in at least half the sessions).
This is the year when Blockchain vendors have to go beyond 30,000 foot promises and deliver value (or get relegated to the dustbin of overhyped technologies).
When Core Banking systems were introduced in the 1970s, they were revolutionary. They turned paper processes into computerized processes and the financial payoff for banks was massive and the entrepreneurs who built those Back Office systems became very rich.
Since then we have had over 40 years of incremental upgrades. Back Office has been boring. We have had a lot of Business Process Optimization & Outsourcing (BPOO).
Now we are entering the Back Office 2.0 era using Blockchain when we do not optimize old processes, we eliminate old processes. This the era of Business Process Elimination (BPE).
Equities Post Trade Processing After Concurrent Delivery Versus Payment
This is an example of Business Process Elimination (BPE). Concurrent Delivery Versus Payment (CDVP) is the more technically precise term for what usually gets called Real Time Settlement. For a description of real projects working on this, please see this post.
Bank of International Settlements (BIS) defined Real Time Settlement as Delivery Versus Payment (DVP) Model 1. That definition was 23 years ago in 1992, but we had to wait all this time for Blockchain technology to make it feasible. The key points as defined by BIS are:
- Both securities and funds need concurrent settlement. Transfer has to be final & unconditional, without any time lag between the two. This concurrency requirement is absolute, because any time lag is an opening for fraud and that requires a lot of process to prevent.
- Must be on a gross (trade for trade) basis. Any attempt at netting creates delay and creates a multi-tier market infrastructure that will impede innovation. We have Real Time Gross Settlement (RTGS) today – between Central Banks. The disruptive change is RTGS between individuals and companies in a permissionless network (ie the way that the Internet works).
The point about Business Process Elimination (BPE) is that most the things we do in Post Trade Processing are no longer needed when we move to Concurrent Delivery Versus Payment. The processes are not optimized, they are eliminated.
Equities Settlement is only one example. Almost every asset class will move in this direction. The notoriously complex triparty Insurance claims process (customer, provider, insurance company) will also move to a trustless blockchain network. We looked at one exotic transaction type – catastrophe swaps – in this post.
This is about value exchange in any market, not just banking and insurance.
The New Back Office Stack
User Experience is the visible part of the offering and will be the source of real innovation and value creation. The reason they will be able to innovate so fast is that the rest of the stack gives them so much value.
Business As A Service is a new type of entity that is being created as we speak. They could come from a bank or an emergent Fintech or a Traditional Fintech. The key is that they do not just offer technology. Of course they do that. They also offer service delivered by humans and may also offer a regulated layer. It is a complete business service delivered to the User Experience layer via an Open API.
Blockchain middleware is a nascent space where cross-cutting services dealing with concerns such as Identity or Security or Data Integrity play.
Blockchain platforms really means a consensus mechanism and transactional currency that enables entities that do not trust each other to transact. The main options today are Sidechains (using Bitcoin), Etherum (Ether) and Ripple.
The key about this emerging stack is that each layer isolates the layer below and enables a practical migration strategy. For example, at the User Experience layer you may use different Business As A Service providers and migrate from a conventional IT stack to this new Blockchain model. A Business As A Service provider may start by build services such as Identity or Security or Data Integrity using a conventional IT stack. Blackchain Middleware will be agnostic to which Blockchain platform they use.