The Surging Appetite for Cloud-Based Services

I recently wrote an article for Capital Markets CIO Outlook that incorporates my thinking on the transition from one architecture to another in capital markets. I have the benefit of some of the great thinking of our analyst team on cloud, emerging technologies, and DLT.

While the end-state is unclear, directionally more and more capital markets firms are moving to cloud-based infrastructure, BPO, and IT outsourcing.

CIOs take note: I encourage you to, as much as possible, look outside your own four walls for inspiration.

See here.

Central Bank-Issued Digital Currency

I just published a new report titled Central Bank-Issued Digital Currency: Assessing Central Bank Perspectives of DLT and Implications for Fiat Currency and Policy Stimulus.

The future of DLT appears inextricably linked with the future of banking & capital markets and given the significant impact that central banks are having upon finance, the perspectives of this critical constituency warrants careful examination with respect to such a game-changing technology.

On 28 September 2016, the Financial Services Committee met with Federal Reserve Chair Janet Yellen at the Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System. Yellen informed the committee members that blockchain could have very significant implications for the payments system, and innovation using these technologies could be extremely helpful and bring benefits to society.

This is further evidence of the significant and growing interest of central banks in DLT, but what is much less understood is how such technology could transform the role of central banks and commercial banks. Central bank-issued digital currencies present an opportunity to re-architect the financial system to achieve key central bank objectives. The perceived benefits include a new payments system, granular data on key macroeconomic variables, expansion of the policy stimulus toolkit, and improved prudential regulation.

Central banks themselves seem at an important juncture as they appear to be reaching the limits of their current policies — whether or not they are will only be determined with hindsight. In the meantime, in this report we delve into the mindset of central banks through analysing their extensive back catalogue of research to gain critical insights into the policy framework they may adopt going forward and how advances in technology may increasingly play a part.

This is the second in my current series of three reports on distributed ledger technology:

  • The first report considered DLT with gold (Micro Gold);
  • This report considers integrating DLT with Central Bank-Issued Digital Currency (CBDC);
  • The final report will compare fiat currency, Micro Gold, and cryptocurrencies as competition for payments systems, storing value, and money itself continues to rapidly unfold.

Straddling the Old and the New – Fintech in the Capital Markets

We are sitting at an extraordinary inflection point in the capital markets. The competitive landscape is in flux as competitors find their way through a maze of constraints. The constraints are well known-increasing regulation, rapidly changing market structure, liquidity challenges, and difficult macroeconomic conditions. There is also a feedback loop with the broader economy; many of the same forces that are constraining the capital markets are creating an unusual political landscape. We have seen this playout with Brexit, and the world awaits the outcome of the US presidential election. These then feedback into the capital market as uncertainty around managing volatility, risk and whether regulation will proceed as expected will be delayed or, radically altered.

For many capital market incumbents: the investment banks, broker-dealers, asset managers, and infrastructure firms are also saddled with extremely complicated legacy systems that are highly siloed, very expensive to run and even more expensive to change. While many are rationalizing systems, in certain areas it is just not possible. In many cases, ancient systems are running broad swaths of the back office, and sit under decades of add-ons, fit-ins, force-ins, and integrate with countless systems internal and external. Capital market firms are often in the habit of creating an abstraction layer above systems to tie more and more data and systems together. This creates a kludgy infrastructure, but it can, and does work.

Given that there are so many challenges, and hence opportunities, we have seen a slew of fintechs increasingly offering capital market solutions. There are those that come from the capital markets and speak the language of the markets. They have grown up in the space and see an opportunity to solve a particular pain point in investment process, trading or operations. There are other fintechs that have entered the vertical from another and are leveraging their data processing, analytical, machine learning, and hardware acceleration prowess in the capital markets.

We have seen fintech disruption in banking, but in the capital markets, so far, it has been much more collaboration than disruption. Fintech firms are bringing unique data, analytic, technology solutions into a highly regulated business. Fintechs that partner with existing firms are offered scale, legitimacy, and clients in a highly risk averse and regulation heavy business. For the brave incumbent firms who are providing capital and nuanced expertise to these innovators, there are rewards: new ways of looking at their business, but more importantly, ready built solutions that they can scale. Overcoming the fear of engaging these firms effectively is a path to finding better and more cost-effective solutions.

In my report, From Financial Technology to Fintech: Trends in Capital Markets, I look at the areas in which the rate of change is greatest, the nature of fintech partnerships in the capital markets and how they are evolving. I look at the pain points in KYC, liquidity, trading, liquidity, collateral and operations. I investigate the growing acceptance of cloud, the importance of leveraging data correctly and analytics and tie these to specific providers with solutions in InvestmentTech, MarketTech, RegTech and AltData. I also look at emerging technologies such as distributed ledger technology, AI, and business models that are looking to remap the capital markets at its core.

Yes, we are at an inflection point and some of the systems out there are kludgy, but in the short term, solving specific business pain points is the key to solving some of the industry’s thorniest problems.

Micro Gold –This is going to be very big

I published a report today looking at the powerful combination of DLT with physical gold to create an asset class we call Micro Gold.

The report explores the key drivers for this use case including the prevailing environment of negative nominal interest rates, full interoperability with legacy systems, and a blue sky opportunity due to the lack of incumbency.

The combination of a regulated central bank asset with the functionality of DLT presents an enormously compelling platform for payments, wealth management, and a host of other use cases.

For those who have read our report, Beyond the Buzz, you have seen our framework for assessing the maturity of DLT use cases based upon the level of cooperation required with competitors, new FinTech entrants, other market participants, regulators, and so on.

Ultimately though, the key question is how does one achieve broad adoption of a new technology in the financial market place? Well, Micro Gold has demonstrated rates of adoption which outstrip technologies such as Uber, Facebook, and PayPal when they were at similar stages of maturity.

The breadth of relevance of this technology is simply staggering including individual payments, individual savings, global business payments, private wealth management-even the underbanked. Emerging markets and developed markets alike will see the utility of Micro Gold while a seamless UX, regulatory clarity, and micropayment functionality will continue to support adoption rates and, critically, network effects.

It also has a range of ways of mitigating ‘hacking risk’ which continues to be an issue for cryptocurrencies, financial institutions, and (let’s face it) everyone.

The potential for new use cases to emerge via developer APIs adds additional sizzle factor. Hence, I have enormous confidence in Micro Gold. It will be interesting to observe how this story unfolds as vendors and FIs step up their intensity as the pressure grows to implement and commercialize DLT use cases.

This report is the first of a series of three reports which I will be publishing which will explore the implications of DLT for fiat currency; the next report will look at the hot topic of Central Banks and provides a framework for how they may be thinking about its potential.

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.