Where Finance Finds Its Future

Bond markets were a primary target of blockchain technologists. As early as 2017-18 bonds were being issued and auctioned on blockchains by banks and benchmark issuers, and proofs of concept continued throughout the blockchain winter that took hold in 2019. In the Spring of 2021, the European Investment Bank issued a tokenised bond on to a public blockchain without the intermediation of a central securities depository (CSD) or a custodian bank. For a time it looked as if that one deal might finally transform promise into reality. A year later, a familiar pattern is restored: experiments without lift-off. Issuances and transactions in high volumes are conspicuous by their absence from the tokenised bond markets, which remain a cottage industry in a global marketplace capitalised at more than US$120 trillion. True, a new breed of token exchanges such as ADD-X in Singapore and SDX in Zurich are now hosting bond issues, but they too are still proving the technology and technique works rather than riding a rocket ship. Fulfilment of the signal promise of blockchain technology – namely, cost-cutting through disintermediation – is proving worryingly elusive. The FinTechs and exchanges which have identified the bond markets as an opportunity ripe for tokenisation are careful to stress that they have no intention of disintermediating investment banks, CSDs, custodian banks or issuing and paying agency banks, or indeed anybody else. As if to emphasise this point, the R3 Corda blockchain that turns existing intermediaries into members of private, permissioned blockchain networks has emerged as the technology provider of first choice for bond market FinTechs. The alleged remark of Clinton adviser James Carville (“I want to come back as the bond market. You can intimidate everybody”) certainly seems to apply to FinTechs, whose reluctance to challenge openly the banking stranglehold on the bond markets is almost palpable. Instead, investors and issuers are promised a more efficient primary market process, with less use of paper documents and the telephone and more use of simultaneous and controlled digital access to useful information such as initial term sheets, contractual agreements, prices and holders of particular bonds. Yet it is possible that such modest ambitions could conceal a revolutionary outcome, if not intent. Bond market FinTechs could morph into information entrepots that displace CSDs, issuing and paying agency banks and custodian banks by a gradual process of encroachment into the crucial data flows that makes such intermediaries evidently redundant. Who needs a CSD or a custodian when you can issue bonds on to a blockchain in fully registered form and settle transactions the same day? In theory, investors on a blockchain network can transact directly with each other without waiting for a bank to confirm it has received the cash or the securities. And nobody will need an issuing or paying agent when the coupons can be paid by smart contracts. All of these functions will be fulfilled by efficient data flows rather than by reconciliation of separate data sets. This Future of Finance webinar will ask whether the apparent timidity of the bond market innovators conceals something much more threatening to at least some of the existing intermediaries. Hosted on Acast. See acast.com/privacy for more information.

Growing institutional interest in the largest and most liquid crypto-currencies is now spilling over into staking via Decentralised Finance (DeFi) protocols and into Non Fungible Tokens (NFTs). While widening institutional interest in digital assets is partly explicable as a search for an income-producing outlet for crypto-currency holdings, it also attests to a growing institutional confidence that blockchain-based networks will one disrupt the established order in the money and capital markets. The joint venture partners behind one regulated digital asset custodian for institutional traders and investors – investment bank Nomura, blockchain technology vendor Ledger and crypto-currency fund manager CoinShares – are certainly betting on that outcome, with the support of some shrewd private investors. Dominic Hobson, co-founder of Future of Finance, spoke to Sebastian Widmann, Head of Strategy at Komainu, about the origins and growth of the firm. Hosted on Acast. See acast.com/privacy for more information.

The Metaverse is notoriously hard to define. Those definitions which do exist describe a digital facsimile of the physical world, which people enter as avatars by donning headsets and hand sensors. Once inside, they walk around, talk to people, attend meetings and events, visit buildings and buy and sell goods and services, just as they do in the physical world. For businesses, it is the last of these activities that matters. For them, the Metaverse is a new way to find customers and sell them things. Indeed, the fact that Facebook has changed its name to exploit the opportunity has prompted many to predict that the Metaverse will take the manipulation of human behaviour to a whole new level (one comparable, perhaps, to The Matrix) and that users will once again be products rather than customers or creators. Already, Facebook has a digital wallet (Novi) and a Stablecoin (Diem) whose original use-case was to enable Facebook users to buy and sell products and services through the social media platform.Opening branches in the Metaverse will test bankers as merchandisersWherever transactions occur, banks can almost always be found, transmitting money or exchanging monies. Nor is there any reason why the products being sold in the Metaverse (and they are sold rather than bought) should not generate sales of other financial products, such as insurance and asset management. However, unlike Facebook, traditional financial institutions have so far failed to convince themselves that they can profit from the Metaverse. Yet there are some obvious moves to make. The fact that Bank of America is using Virtual Reality (VR) headsets to make its salesmen and relationship managers more effective is not Metaversal: it is just a training aid of the type airlines and armies have used for years. But the next step is conspicuous: close physical bank branches, open virtual bank branches in the Metaverse and replace the flesh-and-blood salesmen and women with virtual reality avatars that customers can engage with instead. In fact, this move is so obvious that Kookmin Bank in Korea has already made it, and other Korean banks and brokers are following its example.Find out more at: https://futureoffinance.biz/2022/01/31/how-banks-can-make-money-in-the-metaverse/Among the topics to be discussed at this webinar are:Is there a sound definition of the Metaverse?What does the Metaverse owe to the video-gaming industry?Is the Metaverse best built on blockchain technologies?Are crypto-currencies, Stablecoins, utility tokens, payment tokens, security tokens and Non-Fungible Tokens (NFTs) incidental to the Metaverse or central to it?What financial services use-cases for the Metaverse are there?How do those use-cases vary between (a) banks (b) asset managers and (c) insurers?How can the Metaverse avoid becoming a series of walled gardens as opposed to a decentralised network of parallel but linked Metaverses?How can standards best be developed to facilitate data exchange between Metaverses?How serious an obstacle to progress are the headsets and sensors?Does the technology currently support the production of compelling content, especially in terms of speed and scale?What are the major engineering challenges that the Metaverse poses? Hosted on Acast. See acast.com/privacy for more information.

A market in which the assets coveted by investors for use as profile pictures or digital avatars are branded as Crypto-Punks, members of the Bored Ape Yacht or Kennel Club, or as Pudgy Penguins, is redolent of the Pokemon card craze of the 1990s. As it happens, the popularity of these Non-Fungible Token (NFT) collections with gameified nomenclatures has sparked a rediscovery of Pokemon cards, which are enjoying a nostalgia boom. That incidental side-impact is not a surprising one, because the scale of the NFT market is increasingly hard to ignore. In 2021 investors sank at least US$44.2 billion into NFTs, according to Chainalysis. Transaction volumes, total value invested and average transaction size all rose sharply by comparison with 2020. The blockchain data platform bases its estimate on the amount of crypto-currency sent to the ERC-721 and ERC-1155 contracts, the two types of Ethereum smart contract associated with NFT marketplaces and collections.NFT marketplaces offer art, collectibles, videos, music and sportsThe fact that most NFTs are built on Ethereum is a major factor behind the surging transaction costs (“gas fees”) on Ethereum, and the associated interest in the low-to-zero transaction cost alternative of the Solana blockchain protocol. Most of the purchases made are intermediated by a newish breed of commission-based NFT marketplaces of which the biggest, OpenSea, is also built on Ethereum. The NFT marketplaces are akin to crypto-currency exchanges such as Coinbase but minus the custody function (unlike the crypto-currency exchanges, most NFT marketplaces expect investors to own and operate their own digital wallet) and plus (in the case of the most successful NFT marketplaces) a genuinely decentralised model. OpenSea, which currently lists more than 6,000 NFT collections, is the generalist option. Other NFT marketplaces (such as art marketplace Nifty Gateway, which is owned by cryptocurrency exchange Gemini, a parentage that enables provision of a custody service) focus on niches.The NFTs available are not confined to unique digital collectibles such as Bored Apes (there are only 10,000 available) or Pudgy Penguins (8,888). Fine art, videos, music and physical objects are also available as NFTs. Artist Damien Hirst has sold 9,000 of 10,000 unique, hand-painted, dot-covered works on paper at a price of US$2,000 each. He has given buyers 12 months to decide if they wish to take ownership of the physical work or own the NFT instead. If they choose the NFT, the physical work will be destroyed. Secondary market trades have raised the total market value of the Hirst collection to more than US$500 million. The traditional art auctioneers, whose nose for anything that smells of money is as finely tuned as the most shameless investment bank, have moved into the market. Christie’s made US$150 million from NFT sales in 2021 (US$69.3 million of it from Everydays: The First 5,000 Days, a digital art collage by artist Mike Winklelmann, better known as Beeple). Sotheby’s made US$100 million from NFT sales in 2021, including from sales of Bored Apes.Among the topics to be discussed at this webinar are:Who invented NFTs?What explains the recent growth of the NFT markets?How can NFTs best be categorised?What are the sources of value of an NFT?What are the links between blockchain, crypto-currencies, tokenisation and DeFI?Find out more at: https://futureoffinance.biz/2022/02/02/the-good-reasons-and-the-bad-for-taking-nfts-seriously/ Hosted on Acast. See acast.com/privacy for more information.

A Future of Finance interview with David Nicol, CEO and Co-founder of LedgerEdge. The US$124 billion global bond markets seem at last to be taking pole position in the race to unlock the efficiencies conferred by blockchain technology. Much of the effort is directed at the primary markets, where the telephone plays the part it has since the 1960s and the fax and spreadsheet continue in the roles they stole from the telex and the pocket calculator in the 1980s. But the real prize in fixed income lies in the secondary market, and especially in corporate bond markets that have become a byword for illiquidity and price opacity. Enter LedgerEdge, a two-year-old start-up based on R3 Corda technology that is exciting the buy-side as well as the sell-side with its promise of a decentralised marketplace in which it will be possible to find and then buy and sell corporate bonds without expensive information leakage. After making rapid progress since its foundation in 2020, LedgerEdge has acquired its regulatory licence from the Financial Conduct Authority (FCA) in London and is on course for its UK, US and EU launches in the second and third quarters of 2022. Future of Finance co-founder Dominic Hobson spoke to LedgerEdge CEO and Co-founder David Nicol. Hosted on Acast. See acast.com/privacy for more information.

Central Bank Digital Currencies (CBDCs) can seem like nuclear fusion: a proven technology delayed by engineering problems. It is an analogy that Simon Chantry will enjoy since he began his career as a nuclear engineer before co-founding the blockchain-based digital currency technology provider Bitt in 2013. As CIO at Bitt, he has implemented the Bitt Digital Currency Management System (DCMS) on behalf of the Eastern Caribbean Central Bank (ECCB) and the Central Bank of Nigeria, putting the company at the heart of two of the first CBDCs to be launched anywhere in the world. The company has also implemented a digital currency wallet for the National Bank of Belize and is now working with the National Bank of Ukraine on a project that is expected to lead to the introduction of electronic money. Dominic Hobson, co-founder of Future of Finance, caught up with Simon Chantry to get the full story behind the eNaira.  Hosted on Acast. See acast.com/privacy for more information.

It is not hard to see why centralised financial market infrastructures are more alive than other financial institutions to the opportunities and threats of distributed ledger technologies. They are the neutral entrepots through which data flows between participants in every financial market so, if every market participant can access the same data simultaneously, the occupation of any provider intermediating point-to-point data flows comes into question. In this environment, the wise market infrastructure chooses to disrupt itself before it is disrupted by others. This is the course taken by Finswitch, the financial market infrastructure that provides the South African fund management industry with pricing, transaction processing, income distribution and data services. It is transitioning to a blockchain-based platform which its leadership and shareholders believe will reduce friction and costs and create opportunities to develop new services. Dominic Hobson, co-founder of Future of Finance, spoke to Nick Baikoff, managing director of Finswitch, about why the organisation is adopting blockchain and how it is bringing its shareholders and users with it.  Hosted on Acast. See acast.com/privacy for more information.

Fine art is often cited as a natural candidate for tokenisation. It is illiquid and traded amongst a small class of wealthy investors at prices which are not always transparent. Fine art also has a long history of generating positive returns, if not the sky-high performance often touted, chiefly through capital gains. However, the entry barriers tend to be high. Minimum investments can be large, and the management and transaction costs extortionate. Art also has to be kept safely and maintained because, like other physical objects, it does decay. Frauds and fakes exceed the norm in investment. However, funds managed by experts do exist and provide a lower risk point of entry into the international art market, if not a lower price point. One of them is led by Xavier Olivella, the CEO of ArtsGain. Dominic Hobson, co-founder of Future of Finance, spoke to him about the investment strategy of ArtsGain, the sorts of investors it attracts, and what part tokenisation can play in broadening the liquidity and appeal of the asset class.   Hosted on Acast. See acast.com/privacy for more information.

One of the signal achievements of blockchain technology is to highlight the inefficiencies of financial market silos in which the free flow of assets and transactions is obstructed by fragmented data sets that must be reconciled laboriously and repeatedly. A vision of the future, in which data and the technology which processes it are distributed and market participants are decentralised, is slowly becoming a day-to-day reality across cash, equity, debt, collateral, foreign exchange (FX) and fund markets. More forward-looking financial market infrastructures are embracing that future in ways that go beyond mere flows of data and finance. They are abandoning the ambition to own every aspect of the business of a client in favour of introducing their clients to third-party products and services and inviting providers of those third-party products and services to introduce them to entirely new types of client. Paradoxically, this more open model is proving easier to develop on the foundations of networks that remain relatively closed. Dominic Hobson, co-founder of Future of Finance asked Angie Walker, Global Head of Capital Markets Business Development at R3, how her clients are building financial markets infrastructures that are common, inter-operable and networked. Hosted on Acast. See acast.com/privacy for more information.

The costs of financial crime are staggeringly high. The financial crime compliance officers that responded to a LexisNexis Risk Solutions survey of financial institutions in 26 markets around the world said they spent US$213.9 billion on compliance with financial crime regulations in 2020. If the main finding of a Refinitiv survey of 19 markets in 2018 still holds, and firms are spending 3.1 per cent of annual turnover on Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening measures, the expenditure is much higher than that figure suggests: US$1.28 trillion, in fact. Despite such vast expenditures, compliance breaches do occur, and regulatory fines ensue. According to the Kroll Enforcement Survey, between 2016 and the first half of 2021, financial institutions paid 338 regulatory fines for money laundering, sanctions breaches and bribery that totalled almost US$26 billion. These fines can be surprisingly chunky. HSBC paid US$1.92 billion in 2013 and ING US$900 million in 2018. Then there is the cost of the financial crime itself. This is much harder to estimate, but the Refinitiv survey put it at 3.5 per cent of the turnover of its respondents, or US$1.45 trillion. And this is the true absurdity: the cost of financial crime compliance (US$1.28 trillion) is now almost as expensive as financial crime itself (US$1.45 trillion). That is the reductio ad absurdum of half a century of regulatory pressure on money launderers, terrorists and other financial criminals. Since the United States passed the Bank Secrecy Act in 1970 to discourage money laundering through secret bank accounts, the financial services industry has assumed a steadily mounting burden of compliance obligations. The PATRIOT Act of 2021 added CFT to the AML requirements of the 1970 Act – and, fatefully, for the first time obliged financial institutions to implement a Customer Identification Program (CIP) to verify the identity of individuals that wish to conduct financial transactions with them. These originally American measures have over the last decade become universal. They are now embodied in the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, first published by the Financial Action Task Force (FATF) in 2012 and updated regularly ever since. More than 200 jurisdictions endorse them now. The European Union (EU) is on the sixth iteration of its Anti Money Laundering Directive (AMLD VI). Yet the chief characteristic of all these legislative and regulatory measures is that they do not work. Financial crime continues to increase. Mounting quantities of people and technology may have slowed its rate of increase but they have manifestly failed to solve the problem. Indeed, the growing volume of e-commerce, crypto-currency and digital assets business, spurred on by the Pandemic, is once more increasing the rate of increase of financial crime. Meanwhile, compliance is not only despised by the revenue generators. It has lost sight completely of its original objective of reducing crime and become an end in itself: a meaningless set of routines designed to avoid fines and reputational damage for non-compliance, by gold-plating processes, over-reporting data and tolerating embarrassingly high proportions of false positives. In short, all that 50 years of increasingly onerous legislative and regulatory measures have achieved is increased costs for financial institutions. Hosted on Acast. See acast.com/privacy for more information.