Read the interview and learn about:
- How blockchain technology is evolving to meet asset management needs
- Common blockchain misconceptions
- Disintermediation, use cases, and anticipated challenges
- What is the biggest challenge to blockchain that few are talking about?
Blockchain – A cross-talk between Citisoft and SimCorp
Blockchain is a buzzword in financial technology and there is a lot of hype around it. But what’s behind the hype and what will blockchain technology mean to investment managers? A lot of different answers and conflicting arguments from stakeholders can make it difficult to get an overview. In this Q&A, two experts shed light on the topic and give their views on how blockchain will impact the investment management industry.
Journal: Will blockchain “change everything” or is it a solution chasing a problem?
Ben Keeler: It’s probably reasonable to say blockchain-enabled solutions are more hype than reality today, but I believe it’s worth investing in R&D. Broad adoption isn’t imminent but blockchain has the potential to reduce cost, provide scale, and support the next generation of investment management. Some get caught up in pushing the disruptive potential of the technology, but we see blockchain as a foundational technology that will require time, failure, and exploration.
Personally, I find it difficult to imagine every investment management operation around the globe still managing basic, common operational processes in say, 2030. Look at mandatory corporate actions. Asset managers are responsible for processing the same activity, repetitively, and reconciling their records with counterparties to whom they pay significant fees for other recordkeeping services. Blockchain-enabled solutions provide an opportunity to change those dynamics.
Igor Gramatikovski: The reason that blockchain is making waves is that in its design, people have seen the potential to change the very way economies are organized by eliminating centralized third parties or authorities of trust. I believe, the reason so many industry players are excited about blockchain is not the technology—as ingenious as it is in the context of a censorship-resistant medium of value exchange outside the existing financial system. Rather, I think the interest stems from its ability to change the current economic setup in a way that transforms existing dominant relationships of power. However, after several years of experimentation and proliferating proof-of-concepts, production use of the technology remains elusive.
Journal: What common misconceptions are you seeing?
Ben Keeler: The first misconception is that all blockchain-related development will mirror the development of bitcoin or other digital currencies. While our industry can learn a lot from others, financial services firms are looking at blockchain technology in a very different way. We share investment in common platforms (such as Ethereum or Hyperledger) but our industry is embarking on a focused and unique path just like healthcare, food production, real estate, and others are. In general, financial services-related activity is focused on three distinct places: 1) digital currency like bitcoin, 2) payments (the process you currently follow when you use your debit card) and 3) distributed, secure networks tasked with transacting and maintaining accurate digital records. Our industry’s focus is on the third, R&D-focused scenario.
The second misconception is that everyone wants to create “one chain to rule them all.” This is completely false. No one actor is going to create this new distributed environment and no one has the stick to force change of that scale. Interoperability between these networks or environments is already a big area of development because growth will be incremental. We don’t use one internet. No one is developing “one blockchain.”
Igor Gramatikovski: There are many misconceptions around blockchain and distributed ledger technologies (DLT), which reflects the fact that as an emerging trend it is not very well understood. Holistically, we need to consider technology (both computer science and database, data structures, and algorithm design), game theory, cryptography, and most importantly finance, as well as the fact that the experience with experimentation is limited.
One such misconception is that the blockchain of the cryptocurrency bitcoin is the same or very similar to the numerous ‘blockchain-inspired’ technologies currently explored out there. Hence, a lot of people ascribe the same properties (and benefits) that apply to bitcoin to any DLT. While the bitcoin system has proven to be quite resilient and successful in the implementation of a decentralized, censorship-resistant and, pseudo-anonymous cryptocurrency, many of its original design features undermine its suitability for ﬁnancial markets use cases. For example, (i) all transactions are visible to everyone, which may violate banking laws and disclose confidential competitors’ information; (ii) POW as a decentralized-consensus mechanism is very costly in terms of computational processing power, time, and energy; in other words, it’s typically an overkill in trusted environments; and (iii) the system is open to anyone who would like to join and participants are anonymous, which violates KYC (know your customer) and AML (anti-money laundering) requirements.