Blockchain's biggest barrier - the desire for change
I attended recently a seminar entitled The Settlement and Custody of Digital Assets. This was advertised as a chance to debate the contrast in value to investors of the current processes against the benefits of blockchain powered digital alternatives.
Well-known figures representing both the old and the new were presided over by a respected agitator. On the Panel were, on paper, some qualified authorities to guide a discussion into what has been traditionally an unpopular and unloved part of the securities market – “back-office stuff”.
The financial target was laid-out for the audience early on. This held that the long-term savings in the UK was £9 trillion, which are “served” by capital market services at a rough annual cost of 2%: £180 billion in round figures. Of this amount Custodian activities – keeping the assets safe – account for £90 billion a year and Fund Management the further £90 billion.
The immediate reaction to these figures collectively was one of surprise and outrage that safe keeping should cost so much for delivering so little. Complete inefficiency as an accusation just made it ahead of the villainy of banks daring to perpetrate this. May be because it was not on the seminar agenda, the £90 billion cost of fund management attracted little mention. Ever seen a poor fund manager?
Blockchain technology’s superior security, it was claimed, would remove the need for independent custodians. This allowed the Panel, for whom the red mist had descended, to focus on the inefficiency of the securities settlement process and how frustrating traders found the mill-stone of processing their trades. Any delay or frictional cost to the process of acting as securities bookmakers or slowing the spin of the exchange roulette wheel was an abomination to the altar of pure liquidity.
In searching for scapegoats, it took little time to identify the lack of sympathy of regulators and their regulatory regimes as major causes of the current absurdities in processing the transfers in ownership of securities and the efficient, risk-free payment for them.
Various examples of “Bitcoin” adaptations were examined and new payment services held up as offering workable solutions to the cash obligation in settlement.
What was striking was how little time was given to analysing whether the digital revolution might be an opportunity to reinvent how capital markets work and thereby provide greater benefit to the users and suppliers of capital - that is the companies and governments needing funds, and the investors providing the savings for investment.
As John Kay remarked in his historic review of equity markets, they (the markets) seem to represent intermediation for the sake of intermediation with little thought given to the primary users.
So digital solutions are being devised to make the existing business of custody more efficient, and the settlement and risk management of vast volumes of largely unnecessary trading activity is being transformed to be instantaneous, whilst huge volumes of data from this endeavour will be fed back into it, at a colossal rent paid to the “legal” owners of the information.
A comical moment occurred when it was observed that issuers were no longer using these markets for raising capital and had found cheaper and less conflicted funding sources elsewhere. The truth of the statement was acknowledged – but what had that got to do with the excellence of digital technology?
As G.K.Chesterton wrote, "It's not that they can't see the solution. They can't see the problem."