A lot has transpired since we last covered the topic of blockchain in financial services in the May 2017 Maven Wave newsletter: at that time, the price of bitcoin (BTC) had yet to rise above $2,000 and the concept of an ICO (initial coin offering) was just emerging in the eyes of the public. Since then, BTC topped $19,000 in December and has recently traded around $8,000 while ICO’s raised $5.6 billion in 2017 and, according to PwC, over $13 billion so far in 2018.
Clearly, there is a great deal of interest in blockchain but what is the current rate of adoption of blockchain in financial services and what does the immediate future hold for the use of this exciting new technology? Conveniently, the cases we explored in our previous article offer an instructive array of developments that illustrate the advancement of blockchain in financial services as one was abandoned, a second has evolved, and a third is building slowly on the basis of early success. In the end, the lessons so far are that many ideas die on the vine, others do their best to evolve as new insights arise, and the keenest lessons come from those who address a size appropriate challenge, receive feedback, iterate in turn, and expand and scale as they go.
A Solution in Search of a Problem
One interesting blockchain project originated from DTCC and involved utilizing blockchain to improve capital efficiency in the market for repo, the market for short-term lending, and borrowing of U.S. Treasury securities by large financial institutions. After a promising POC with blockchain leader Digital Asset in early 2017, DTCC decided by March of this year to abandon the project. According to Murray Pozmanter, Managing Director at DTCC, banks and other potential users believed the same results could be achieved more cheaply using current technology saying that “basically, it became a solution in search of a problem.”
That’s not the end of the story, however, as DTCC found other ways to improve the repo market and otherwise remains committed to exploring the utility of blockchain technology. In March of 2018, DTCC expanded the universe of participants in the repo market with the introduction of sponsored repo from buy-side firms, boosting the market through participation rather than technology. DTCC Chairman Michael Bodson also signaled a continued interest in blockchain, including the decision to re-platform their Trade Information Warehouse for credit derivatives on a blockchain platform later in 2018.
If at First You Don’t Succeed…
The market for online advertising is the target of NYIAX and they teamed with Nasdaq to create an electronic marketplace for digital advertising inventory. The offering is conceptually ideal for blockchain implementation as it could potentially transform the way that business gets done by providing greater transparency and efficiency. However, while the addressable market is large and the proposed solution offered a vast improvement from existing alternatives it appears that the NYIAX solution doesn’t meet all of the needs of the marketplace.
Specifically, the market for online digital advertising has been marred by the presence of scammers who trick companies into advertising on unauthorized websites. In one infamous case, scammers hijacked ads intended for the New York Times by rewriting the location URL. At the same time, these scammers typically deploy bots to visit the fake sites and thereby increase their ad payouts. Unfortunately for NYIAX, their solution doesn’t in anyway address this problem. Enter Rebel AI. They counter the scammers by utilizing the public and private keys of a blockchain to ensure that sites are authorized and legitimate and NYIAX has teamed up with them to support their offering.
While NYIAX did not meet its goal of a late 2017 launch, it has managed to secure a new round of financing and the attention of the advertising industry, so prospects are still good. The space is not without competition from the likes of MadHive, MetaX, Comcast, IBM, and Google, but that only validates the opportunity. Time will tell who the winner or winners will be.
Small Wins Lead to Expansion
Often, there’s something to be said for taking an agile approach by starting small because it can lead to real learning that can then be expanded upon for further success. By making many small, iterative steps and asserting value in the intended direction, it is possible to stamp out a framework that can later be scaled for greater success. That seems to be the case with Northern Trust and their use of blockchain for a private equity fund. With a project that kicked off late in 2016, Northern focused on one fund in one jurisdiction with one administrator, one technology partner and one regulator to prove the concept was valid. Following upon that success in 2017, Northern Trust expanded their private blockchain in March of this year to include the ability to audit equity lifecycle events in realtime by partnering with PwC.
“By expanding our private equity blockchain ecosystem to the audit community, Northern Trust has enabled audit transactions to be recorded on a blockchain in real time,” said Pete Cherecwich, president of Corporate & Institutional Services at Northern Trust. “This will result in direct efficiencies to both the audit firms and Northern Trust, and provide investors with a more timely and valued assurance product.”
Northern Trust has shown a deep commitment to blockchain, including securing two patents for recording fund administration activities on a blockchain and signaling that they are entering the nascent market of cryptoasset custody. This is an area that has been crying out for serious institutional participation from participants in the burgeoning cryptocurrencies trading market. In all of their efforts, Northern has shown a propensity for building on small wins rather than succumbing to the temptation of tackling big opportunities by trying to boil the ocean.
Taken together, the cases of DTCC, NYIAX, and Northern Trust are emblematic of a technology that is very much in the earliest stages of development and adoption. Many, if not most, cases will wind up abandoned like DTCC and repo while another significant percentage of projects will shapeshift and evolve as NYIAX is doing in digital advertising. Through it all, companies like Northern Trust will have small wins and even setbacks as they employ agile methodology to take small bites at the apple to see what does or doesn’t work, quickly adapt with lessons learned, and accelerate their efforts along the way.
At the end of the day, Blockchain appears to approaching us like a tsunami, which is subtle and quiet out on the open sea, but as it reaches the shoreline it magnifies in force. Perhaps the key to success is to identify with the surfer who will prosper from the wave before it comes crashing down on those who are flat footed observing from the shoreline.