Where Finance Finds Its Future

A Future of Finance Webinar that investigates whether the adoption and impact of Blockchain could be accelerated by pursuing an infrastructural strategy that lowers the cost of adoption, recovers the openness of the early Internet and facilitates inter-operability between different networks. A major economic mystery is why a general-purpose technology such as digital computing has not transformed productivity. After all, the marginal cost of producing further copies of software is effectively zero. Part of the answer, despite 25 years of the Internet and open-source software, is that software lacks an open infrastructure akin to the electricity grid or the road network. A true infrastructure is a shared and (crucially) open means to many ends. It creates value obliquely rather than vectorally, by enabling third party businesses and entrepreneurs to create new and innovative products and services on a reliable and low-cost foundation. Instead, the value created by digital technology is currently being privatised, chiefly by the massive data extraction platforms such as Facebook, Google, Microsoft, Uber and Airbnb, which have used network effects to build powerful monopolies. Although they do provide platforms for third-party businesses to advertise and sell, they take a turn on transactions, extract data from transactions for sale to third parties and suppress innovation through a combination of patents, purchases and the blight cast on innovation by their sheer size and invulnerability. A true infrastructure would spawn a constant series of innovations, as the electricity grid did and does (including, ironically, digital computing). And there are now signs that just such an infrastructure is coming into being in the financial markets. Open Banking and Open Finance are prising open the closed customer bases and data sets of incumbent firms, presaging the emergence of an Open Data economy in which customers rather than companies drive the evolution of economies. Forward-thinking financial institutions (such as LSEG) are embracing this shift from data platforms to open data networks by introducing their clients to third party product and service providers via a blockchain-based network. Blockchain is an obvious rather than inspired choice to fulfil the role. It is intrinsically decentralised and networked. At its heart lies the concept of simultaneous data-sharing. So Blockchain is the natural infrastructural underpinning of the networked markets that are now primed to succeed the platforms controlled by the large technology companies. Unfortunately, Blockchain has until recently succumbed to the same supply-side economics that has prevented previous digital technologies from transforming productivity: networks are fragmented by incompatible protocols designed to privatise and protect the profits of successful blockchain ventures. But there is work in hand today that is enabling blockchain to rediscover its original vocation. Efforts to bridge protocols by agreed data communication standards is one part of it. But there are also collaborative public-private enterprises such as the LACChain Alliance in Latin America, Alastria in Spain and the Blockchain Services Infrastructure (EBSI) in the European Union (EU) which aim to provide open, low cost blockchain infrastructures to innovative businesses. Hosted on Acast. See acast.com/privacy for more information.

A Future of Finance interview with Thomas von Hohenhau and Marcel Fleisch from V Bank.Liechtenstein is one financial jurisdiction which has embraced the blockchain enthusiastically. It has since January 2020 had in place comprehensive legislation covering all aspects of tokenisation in the shape of the Token and Trustworthy Technologies Service Provider Act (TVTG). The Act is, says VP Bank, one of the factors that has made possible its own rapidly developing asset tokenisation service. The Lichtenstein private bank sees the tokenisation of collectibles in particular as a major new business opportunity in the immediate future – a work of art belonging to a client was tokenised earlier this year - and is already exploring the tokenisation of real estate and privately managed assets too. Dominic Hobson, co-founder of Future of Finance., spoke to Thomas von Hohenhau, Head of Client Solutions and a Member of the Group Executive Management at VP Bank in Liechtenstein, and Marcel Fleisch, Chief Product Officer at VP Bank. Hosted on Acast. See acast.com/privacy for more information.

Safe custody is the crucial service for crypto-currency investors. The theft, loss or destruction of the unique private keys to the digital wallets in which cryptocurrencies are held is irreversible and – unlike conventional cash deposits - they are not insured by any commercial provider or guaranteed by any government or government agency. Data analytics firm Chainalysis estimates that a fifth of all Bitcoins ever mined (or somewhere between 2.78 and 3.79 million of them, worth over US$200 billion) are now lost. Losses to hacks (such as the US$97 million stolen from Liquid Exchange in October 2021, the US$200 million stolen from Bitmart in December 2021, the US$320 million lost via the Wormhole bridge in February 2022 and the record US$624 million taken from the Ronin Network in March 2022) remain disturbingly frequent. Although some retail investors have ignored these risks, institutional investors cannot. These facts alone explain the two distinct surges in the foundation of digital asset custodians. The first was at the height of the Initial Coin Offering (ICO) boom and early crypto-currency exchange hacks in 2017-18, when no less than 65 specialist custodians were founded, including well-recognised brands such as Copper, Fidelity Digital Assets, HEX Trust, Komainu and Propine and leading custody technology vendors such as Fireblocks. The second boom occurred in 2021, as the first institutional investors such as Ruffer and MassMutual invested in crypto-currency. The two biggest global custodians in the world, BNY Mellon and State Street, found themselves pressed by watching buy-side clients to provide a crypto-currency custody service. A further impetus to invest was imparted by the leading crypto-currency exchanges, which launched independent, institutional grade and (most importantly) regulated custody services. Coinbase, for example, has established an independently capitalised institutional custody business (Coinbase Trust Company) that is regulated by the New York Department of Financial Services (NYDFS). A third threat to the established custodians has come from specialist, independent, regulated, institutional grade custodians such as HEX Trust, Komainu, Standard Custody & Trust and Anchorage Digital. According to Blockdata, another US$1 billion of venture capital money was invested in digital asset custody businesses in 2021, taking the total raised since 2017 to US$4.6 billion. In its most recent fund-raising, technology vendor Fireblocks was valued at US$8 billion. In its last fund-raising, Copper was valued at US$3 billion. In a low margin business, these valuations indicate high growth expectations, and global custodian banks and central securities depositories (CSDs) are right to be concerned that they might be disrupted or even bypassed. That concern ought to become acute if the crypto-currency boom is followed by an equivalent boom in security tokens, though there are at present plenty of bystanders. London-based token exchange Archax is building its own CSD because no existing CSD can meet the needs of its customers. Hosted on Acast. See acast.com/privacy for more information.

Cross-border payments are, in the now familiar mantra of the G20, slow, expensive, opaque and inaccessible. This matters because, despite a slowdown in the rate of growth of world trade, cross-border payments are becoming more important, not less. Remittances and e-commerce are more than making up for any shortfalls in exchanges of physical goods. Consultants BCG predict the value of cross-border payments will increase from US$150 trillion in 2017 to US$250 trillion by 2027 – a two thirds increase in just a decade. As it happens, 2027 is the date set by the Financial Stability Board (FSB) for the achievement of four quantitative targets designed not only to cut the costs, increase the speed and enhance the visibility of the costs of cross-border payments but widen access to competitive cross-border payments services as well. The four targets are just one of 19 “building blocks” laid down by The Committee on Payments and Market Infrastructures (CPMI) in July 2020 as the foundations of a better, faster and cheaper cross-border payments system for the world economy. Unfortunately, the targets are also the only product of the 19 building blocks which can readily be grasped amid the miasma of surveys, analyses, consultations, task groups, workshops, liaisons, hackathons and vague but extendable deadlines which surround alleged progress in other areas. Yet fast and measurable progress is desperately needed. Cross-border payments represent a continuous and hefty toll on international trade and capital flows. Transactions can take several days, cost ten times as much as a domestic payment and devour 10 per cent of the face value of a payment. Although the work of the FSB reads as if the problem is extremely complicated – and it is, not least because of the number and range of the parties involved – the origins of this tax on commerce are now well-understood. The CPMI labels them as seven “frictions”: legacy technology; long transaction chains; funding costs; weak competition; fragmented and truncated data formats; complex compliance checks; and limited operating hours. The G20 made fixing these frictions a priority. In many jurisdictions, competition to provide cross-border payments services cannot work because cost opacity means payers cannot distinguish between the costs of different ways of paying; most domestic banks can do no better than take prices from a coterie of 15 major global banks; and non-bank service providers are denied access to the central bank real-time gross settlement (RTGS) system. Likewise, replacing laborious customer due diligence tests with digital identities is an obvious way to cut costs dramatically and speed up the processing of payments, but the FSB now seems more interested in creating centralised data utilities than in re-designing a failed procedure. Allowing assets in one jurisdiction to secure liquidity in another would not only ease cross-border payments blockages but free up resources trapped in excess liquidity buffers, but private sector initiative to solve this problem are unmentioned. Hosted on Acast. See acast.com/privacy for more information.

Part 2 of a Future of Finance interview with Vadim Sobolevski, co-founder of FutureFlow.No one central bank digital currency (CBDC) is ever quite the same as another. But so far every CBDC project has focused largely on the technicalities of making payments – by or to unbanked consumers or businesses, or between counterparties across national borders, or to prevent consumers and businesses undermining the role of central banks by making payments with alternatives such as cryptocurrencies or Stablecoins. This has confined thinking to far too narrow a range, argues Vadim Sobolevski, co-founder of FutureFlow. He thinks CBDCs have the potential to transform not just the conduct of payments, or even monetary policy, but the implementation of economic and social policy itself. CBDCs, in his view, can and should be used to manufacture credit and direct liquidity precisely where they are needed. He spoke to Future of Finance co-founder, Dominic Hobson. Hosted on Acast. See acast.com/privacy for more information.

Part 1 of a Future of Finance interview with Vadim Sobolevski, co-founder of FutureFlow. Many business decisions are baffling. But on the face of it none is as bewildering as the decision by banks, asset managers, wealth managers, private banks, insurance companies and FinTechs to spend hundreds of billions of dollars a year on Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening checks that are not only expensive but useless. The answer is that regulated firms are buying insurance against the wrath of the regulators, and data vendors are delighted to provide it by plying them with high-priced but ineffective data on bad actors in financial markets. Dominic Hobson, co-founder of Future of Finance, asked Vadim Sobolevski, co-founder of FutureFlow, whether there is a better way. Hosted on Acast. See acast.com/privacy for more information.

Future of Finance interview with Lisa Fall, CEO at BSTX and Jay Fraser, Head of Strategy at BSTX.BSTX is the first exchange based on blockchain to be fully regulated by the Securities and Exchange Commission (SEC) and licensed to operate on a national scale. It took the founders of the Boston-based exchange years to get there but they were clear from the outset that fully regulated status is the key to success. It certainly makes it easier to engage regulated brokers and market-makers as well as institutional investors. So does allowing those trading firms to communicate with each other via the FIX protocol and clear and settle trades through the traditional securities and funds clearing house (NSCC) and the American central securities depository (DTC). Dominic Hobson, co-founder of Future of Finance, spoke to Lisa Fall, CEO, and Jay Fraser, Director of Strategic Partnerships at the Boston-based exchange. Hosted on Acast. See acast.com/privacy for more information.

Artificial intelligence (AI) and machine learning (ML) are technologies subject to errors of pessimism as well as errors of optimism. Predictions of their eventual impact range from dystopias in which machines reduce human beings to helots, through mass, machine-led unemployment, to Utopias of universal leisure in which all the work is done by machines. In the financial services industry, meanwhile, practical applications of AI and ML are yielding substantial returns in the detection of errors and anomalies. The returns certainly include savings in labour costs but also increased fulfilment at work as dreary jobs are automated, and the quality, productivity and output of other forms of work are enhanced. But the highest returns of all come from cumulative innovation, as AI and ML uncover previously unknowable or impractical opportunities to create new and improved services. Dominic Hobson, co-founder of Future of Finance, asked Bob Suh, former chief technology strategist at Accenture and founder and CEO of AI in financial services venture OnCorps, to share the counter-intuitive lessons he has learned from combining a rich understanding of human behaviour with ML algorithms in the asset management industry.  Hosted on Acast. See acast.com/privacy for more information.

“We have yet to hear a convincing case for why the UK needs a retail Central Bank Digital Currency (CBDC),” concluded a report of January 2022 from the Economic Affairs Committee of the House of Lords. “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.” The Committee included a former Governor of the Bank of England and a distinguished economic historian (of the “What would Keynes do?” school). Despite such sceptical voices, the Atlantic Council CBDC Tracker lists 78 retail CBDC projects currently being pursued by central banks around the world and only six that have a wholesale component. Of course, every jurisdiction is different. Each country that has issued a CBDC (the Bahamas) or is experimenting with one (China, the Eastern Caribbean and Nigeria) has its own reasons. For most, the limited reach of conventional banking systems is a major factor. A related concern is the possible cession of monetary sovereignty to crypto-currencies or Stablecoins controlled by private interests. Some (Iran and Russia as well as China) see a CBDC as part of a geopolitical strategy to undermine the dominant position of the US dollar and circumvent reliance on payments systems controlled by geopolitical opponents. In the developed economies of the G7, the momentum is shifting from retail CBDCs back to wholesale CBDCs, where the potentially disruptive effects can be contained within the existing banking system. The emerging use-cases include cross-border payments, trade finance and securities settlement, where numerous experiments led by central banks have proved the technology works. However, concerns that a CBDC might disrupt correspondent banking networks, or undermine the funding of commercial banks with consequently deleterious effects on their capacity to lend, might be fostering an unduly conservative approach in the developed economies. After all, CBDCs also represent an opportunity to re-think the relationship between monetary policy and fiscal policy and how credit is created and distributed in a sophisticated modern economy suffering from pockets of inequality as well as illiquidity. At this webinar, Future of Finance re-visits the arguments for and against retail CBDCs, examines use-cases for wholesale CBDCs and asks whether central banks need to see CBDCs as a massive opportunity to re-design the way money and data flow throughout economies rather than a systemic threat to financial stability. Hosted on Acast. See acast.com/privacy for more information.

For more information click HEREIt is easy to portray the tokenisation of securities as a mortal threat to central securities depositories (CSDs). In principle, security tokens issued on to blockchain networks can dispense with all the core functions of a CSD in safeguarding the integrity of issues, maintaining a register of investors, settling transactions in central bank money, distributing entitlements and maintaining accounts for custodian banks acting on behalf of investors. That is why most of the discussion about the future of CSDs since the tokenisation of securities was first broached in 2018 has focused on the escape routes rather than the paths to the future. CSDs could appoint themselves operators or “governors” of the private, permissioned networks that looked likeliest to be adopted by incumbent financial institutions such as investment banks, custodian banks and asset managers. They could run the Know Your Client (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening checks to filter the issuers and investors that aspired to belong to these networks. CSDs could offer their classic services to the new classes of asset-backed tokens that were expected to emerge from the real estate, fine art, fine wine and collectibles markets, by developing digital wallets and atomic settlement services. By these means, they could make even the Decentralised Finance (DeFi) markets safe for institutional money. Unsurprisingly, when confronted by such defensive tactics and a diverse range of options that were not strategically coherent. many CSDs seemed unable to act at all. Lately, a more positive outlook has become clearer. Central Bank Digital Currencies (CBDCs), by putting central bank money on to blockchain networks, appears to solve the biggest obstacle to settling security token transactions. Even the adventurous institutional investors, dabbling in crypto-currency and token investing for the first time, have made clear they prefer to do so in the company of regulated financial institutions and financial market infrastructures. At least some of the two dozen or so security token exchanges that have emerged incorporate a CSD function, partly because unreconstructed securities laws and regulation insist upon it, but mainly because institutional money feels more comfortable with it. At this webinar, Future of Finance joins forces with The Africa and Middle East Depositories Association (AMEDA) and sponsors Percival Software, a leading provider of CSD systems, to ask: Is tokenisation the nemesis or the apotheosis of the CSD?Some of the topics to be discussed:Will tokenisation of securities kill, maim or transform CSDs?Does the current size of securities token markets argue for a masterful period of inactivity?Has the idea of saving issuers and investors money by disintermediation died?Are the costs of post-trade intermediation so high that they warrant disintermediation?Which intermediaries are at greater risk of disintermediation than CSDs?PanellistsVipin Mahabirsingh, Managing Director at Central Depository & Settlement Co. LtdChris Richardson, CEO at Percival SoftwareAndrea Tranquillini, Senior Post Trade Market Infrastructure ExecutiveMark Smith, CEO and Co-Founder at SymbiontVic Arulchandran, Co-Founder at NivauraModeratorDominic Hobson, Co-Founder and Editorial Director at Future of Finance Hosted on Acast. See acast.com/privacy for more information.