DLT – Beyond the Buzz

We published our new report on distributed ledger technology (DLT) called Beyond the Buzz today where we take a look at a range of use cases for DLT within banking and capital markets in addition to profiling the state of play across this ever-growing ecosystem of financial institutions, Fintechs, Bigtechs, regulators, and industry consortia.

We bring together a framework for assessing the use cases identified in the report, specifically, their status: Announcement; Proof of Concept, Pilot, Implementation, or Broad Adoption versus whether a consortium is driving the technology or a more unilateral/ bilateral initiative is implementing it. The breadth of use cases and complexity of the underlying markets all point to a very mixed picture such that 2016 and 2017 will continue to be active on the news flow front as the number of use cases proliferates and learning curves are climbed.

Interoperability with legacy systems, regulatory clarity, and modularity of technology architecture will all be critical elements to generating the scale and network effects which are so critical to the financial markets. Parallel running of existing systems and markets versus new DLT-enabled systems and markets will present unique challenges. Consequently, we are excited by the opportunities for private market securities which will be a relatively easier breeding ground for testing and implementation of DLT than large, listed, markets. The risks around the inertia of incumbency as we call it will also be much lower.

Regulators have a very important role to play given the distributed nature of the underlying technology and the global nature of its possibilities which will demand regulatory clarity and consensus on a multi-jurisdictional basis. RegTech was a theme that we identified here at Celent earlier than anyone else and the RegTech benefits of DLT are likely to become clearer to regulators and financial institutions as testing and proofs of concept mature. This could become a very important and supportive dynamic.

While we have focused on markets and use cases which have a significant amount of incumbency, we are hugely excited about the potential of DLT to streamline business processes between organizations and the potential for new investable asset classes to emerge. We are also alive to the reality that so much innovation is taking place outside of traditional financial institutions that a broad lens of observation across the entire DLT ecosystem will be essential to keeping track of where viral adoption rates will occur first.

Our next research will focus on precisely that as we will highlight a DLT use case which seems to be significantly ahead of the pack already with full spectrum relevance to: retail and institutional investors; merchants and enterprises; developed markets and emerging markets; with a variety of use cases across finance…stay tuned.

French effort to use Blockchain for SMEs could have relevance for emerging markets

The recent news that a French consortium is beginning work on building post-trade infrastructure for trading of SME stocks in Europe will be of great interest to market participants across the world. The consortium comprises of BNP Paribas Securities Services, Euronext, Société Générale, Caisse des Dépôts, Euroclear, S2iEM and Paris Europlace.

There have been several notable developments with regard to experiments and adoption of Blockchain and distributed ledger technology in the leading capital markets globally. However, the signficance of this particular announcement lies in the fact that it tries to address the needs of the a sector that usually struggles to obtain easy access to the capital markets. If successful, such a project could drastically reduce the time taken for post-trade operations, slash costs and generally make it easier for SMEs to raise funds.

In a recent Celent report, we had found that most of the leading global post-trade providers believed that it was still a little early to expect major changes due to Blockchain technology. While this may be true, the current development would be of a lot of interest to the emerging markets around the world. In several such countries, the cost of accessing capital markets is comparatively high and the technology is also often found lagging, as in the case of European SMEs. If the French effort becomes successful, it could pave the way for application of Blockchain technology to specific tasks in emerging markets, not just to enable SMEs to raise capital better, but to help the overall market to leapfrog in terms of modernizing the market infrastructure.

Regulators and market participants in emerging markets should now see Blockchain and distributed ledger technology as a relevant means for streamlining their trading infrastructure. To that end, it is also important that they encourage firms within their jurisdiction to experiment and adopt such technology for specific local applications and requirements, and not just wait to see how it evolves in mature markets in the next few years. 

Canada experiments with putting fiat currency on Blockchain

In keeping with the recent focus on Canada in the wealth management blogs, I would like to make note of a significant piece of news with regard to Blockchain and distributed ledger technology. For some time, the use of fiat currency on the blockchain has been touted as a necessary step for the development of distributed ledger technology. While central banks in the UK and the US have taken the lead in discussions on this matter in the past, the Canadian central bank, Bank of Canada, has recently revealed that it is planning to experiment with the use of fiat currency on blockchain. It will use blockchain technology developed by the well-known R3 consortium for interbank payments, involving some of the leading commercial banks in Canada. While this is more of an evolutionary step than a revolutionary one, it shows the growing willingness of central banks to take Blockchain seriously. If the experiment does prove successful, the possibility of interbank payments using Blockchain in a real-life scenario is quite likely. Even though the use of such technology by retail customers in this context is still someway off, Blockchain proponents would realise the significance of this announcement. It should also encourage further innovation within the sector. 

From the Celent Innovation Forum, Tokyo

At Celent we have been focusing on financial services technology since our inception. Now of course all eyes are focused on fintech, which we might inversely call the use of technology to disrupt (traditional) financial services. Investment in fintech startups is significant, and the financial markets involved are huge – US$218 trillion annually in the capital markets alone. Celent recently held our latest fintech event in Tokyo to a full house, an indication of the intense interest in fintech in the Japanese market. The day consisted of two Celent presentations on fintech in the retail and institutional securities industries, followed by a discussion panel. Celent senior analyst John Dwyer presented on blockchain technology and its potential use across capital markets. Smart contracts powered by this technology could conceivably replace existing means of executing market transactions, and by enabling direct ownership might displace custodians and other intermediaries. As if this weren’t food for thought enough, governments including the US and UK are taking a serious look at putting the dollar and the pound on blockchains. Talk about fundamental disruption! Senior analyst Will Trout provided an analysis of how automated advice (robo advisory) is reshaping the wealth management industry. After the financial crisis many individuals quite naturally want to manage their assets themselves, but also require investment advice. Robo advisory, which perfectly suits the self-service, mobile lifestyle, is an answer to this dilemma. SoftBank, Nomura Asset Management and The Bank of Tokyo-Mitsubishi UFJ joined the panel discussion, bringing their respective views on cognitive computing; the potential of fintech to lure Japan’s famously reticent retail segment to participate in the markets; and how to mobilize a large organization for innovation. A fundamental question about fintech is who will ultimately derive value from these innovations: fintech startups; technology giants like Alibaba and Google; or the incumbent financial institutions? Due partly to the regulatory stance, in Japan more than in most markets financial institutions may be in the best position to end up in the winner’s box. Only time will tell, for Japan and for markets across the globe, but you can rely on Celent to continue to provide our clients with insights in the rapidly developing world of fintech.