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R E G U L AT I N G
“ESMA feels out
of step with its
contemporaries
globally.”
technological benefit or hurdles to
market adoption than it does about
the hypothetical fears of adoption
is presumably one of the reasons
ESMA also concludes DLT won’t
replace CSDs or CCPs, at least in
the medium term. Not that anyone
has seriously suggested it could
or should. However, the fear of all
fears, that the buy-side will trade
with each other and not need the
sell-side anymore, is a concern best
left solely to the banks.
Although when you think of the
technology, certain use cases such
as trade repositories just make
sense. It’s real-time and omni-di-
rectional. With a distributed ledger
framework applied, it would evolve
from something that is inherently
batch-processing and reconcili-
ation-based to something that is
functionally far more real-time
and verification / synchronisa-
tion-based, not to mention flexibly
permissible, more secure, and
utilising the power of consensus.
Something with actual insight
that could be effectively overseen
and actioned by a regulator with a
meaningful timeliness and shared
easily with other regulators across
the G20. Further complimenting
with a robust framework of oracles,
nodes, and smart contracts would
create a new approach to regula-
tory oversight where processing
and reporting are neutralised and
the focus would be rightfully put
on analytics and the monitoring of
actual risk. DLT would allow for
the creation of a real-time process
where all participants are connect-
ing and collectively verifying each
other’s books of record; thereby
14
TheTrade
Summer 2017
B L O C K C H A I N ]
lessening security and stability
concerns with current technolo-
gies, lessening the role of the regu-
lator, neutralising the need for the
current-state definition of a trade
reposition, and vastly increasing
transparency while doing away
with verifications, reconciliations,
affirmations, and even faxes.
Huge wins
This is all not to say DLT is a silver
bullet for more fundamental struc-
tural issues in the market. But it is
to say, if we’re going to be wholly
theoretical, let’s at least play a role
in evolving and strengthening a
market above and beyond the neg-
ative potential inherent in any new
system, technology, or process. The
work being pioneered by Nasdaq
with the government of Estonia,
Singapore’s focus around insider
trading, and the DTCC’s recent
announcement of a large scale pilot
to ‘re-platform’ the existing Trade
Information Warehouse and their
housing of industry-wide credit
default swap data, are milestones
in a far-reaching discovery process.
Their interest says something
about blockchain and how it
should be embraced in explora-
tion as opposed to intellectual
exile. The challenge now will be
who will implement a production
blockchain that will deliver signif-
icant cost and operations savings,
broad industry adoption, as well as
support more efficient operational
processes.
Interestingly, the UK’s Financial
Conduct Authority (FCA) has also
taken quite a divergent stance from
its sister organisation on block-
chain. The FCA’s focus is more
so on bitcoin functionality than
distributed ledger. In August of
2016, it announced it was close to
approving a small number of firms
to begin formally using bitcoin as
a cryptocurrency. This is a big step
considering virtually no approvals
have been granted thus far, and the
FCA’s stamp is required for local
companies to utilise bitcoin as re-
lated to payments and settlements.
This would implicitly lead towards
further usage of distributed ledger
and other value elements of block-
chain as a major driver behind the
desire to utilise bitcoin, isn’t just
the advent of a new currency, but
because of expectation of massive
savings in the payments and post-
trade settlements across B2B, P2P,
and beyond.
Misinformed fears
They’ve more recently just
released a full-scale consulta-
tion paper on distributed ledger
technology, noting that although
considerations related to regula-
“You run the risk
of stifling market
fairness and limiting
innovation adoption.”
tion, competitive interests, and
operational processes are still to be
vetted, the overarching functional-
ity clearly holds much evolutionary
potential.
DLT allows us to imagine a world
where post-trade activity could be-
come a series of smart transactions
and automated processes that, by
default, remove unnecessary steps,
systems, and cost. However, the
unchecked, misinformed fears of
regulators like ESMA related to
the perceived complexity of these
processes could mean that they
will slow adoption and the success
needed for the industry to survive,
let alone thrive.
Evolve; finance is nothing if not
Darwinian. The fundamental law
of nature is anything not growing
is dying.