William Essex Keeping up with the blockchain Everybodyâ€™s talking about it and you should be listening, says William Essex

There’s no great urgency about blockchain, beyond the simple fact that everybody’s doing it. Sooner or later, an enterprise based on blockchain is going to transform the FX industry in the way that, let’s say, Microsoft and Apple transformed the simple activities of adding things up, writing things down, and showing slides to support your presentation.

Oh, and Facebook transformed the business of telling people what you had for lunch.

That’s the logic behind today’s most striking evolution in socalled ‘blockchain thinking’, which is that (at last) we’ve found the co-operative space. Faced with this potentially very disruptive new technology, we’ve looked for partners, pooled resources, committed to working together – and finally hit upon a methodology for doing that effectively. CLS Group, for example, has brought together a group of committed “early adopters” (including Bank of America, Citibank, Goldman Sachs, HSBC and JPMorgan Chase) to support the phased release (over 2017/18) of the CLS Netting payment-netting service for the FX industry. CLS Netting will be built on a distributedledger platform made out of Hyperledger Fabric (Linux) in collaboration with IBM.

BEST (TECH) FRIENDS FOREVER

We know this. They’ve announced it; they’re working on it. For us, the significance is: everything about the project emphasises collaboration as a form of enlightened selfinterest. David Puth, CEO, CLS Group, speaks of “working with our settlement members and the buy-side” to develop CLS Netting; the company’s paperwork, at the time of the launch, said this: “CLS continues to engage with a wide group of partners to identify and establish best practices and innovative solutions for the use of opensource technology across payment and financial market infrastructures.” Okay, we all talk about our virtues, but a few years back, did we really spread it around like that?

It’s not the technology so much; it’s whether you’re still out in the cold. Nobody does anything on their own any more. It’s as if we’ve spent – how long since blockchain went mainstream? Couple of years? – however long, that long, talking about how to distribute our ledgers, while not realising that we’re already massively engaged in a transformative process of distributing our innovation, our creativity, not quite our whole industry (but maybe we should think about that). Blockchain isn’t new, and wasn’t even new when the banks first engaged with DLT, but the process of developing blockchain-derived methodologies – the process itself – is a radical departure. So what?

DISTRIBUTED INDUSTRY TECHNOLOGY

Blockchain is a catalyst. Harnessing innovation is not harnessing blockchain; it’s harnessing all the insights and skills that become accessible in – let’s face it – the distributed industry that we’ve built out of blockchain/DLT technology and our own collaborative drive. It’s as if the “gig economy” isn’t just for millennials; it works at scale. IBM brings, y’know, seriously hot IT skills to the party; CLS Group knows FX; add in those banks, pick up some open-source software, and you’ve got a team for the payment-netting project. Read the box Safe haven for a safe haven – on blockchain. What does The Royal Mint want you to do now? Buy gold? No. David Janczewski, director of new business at The Royal Mint, says: “We’re now inviting the wider market to participate in this project alongside us and CME Group and we look forward to engaging with interested parties in the days ahead.”

Safe haven for a safe haven, on a blockchain David Janczewski Trading gold? How about Royal Mint Gold (RMG)? Launching next year, RMG will be a “digitised gold offering” designed to “change the way traders and investors trade, execute and settle gold”. Not change the methodology too far – you still get to own (and trade) actual physical gold – but you will be able to do that via the blockchain. And the gold you own will be stored at The Royal Mint’s “highly secure on-site bullion vault storage facility”. RMG is a joint venture between The Royal Mint (“the world’s leading export mint”; if you visit, check out the tubs of freshly minted foreign coins) and CME Group, which, since we’re quoting self-descriptions, is “the world’s leading and most diverse derivatives marketplace”. CME Group will develop and manage the digital trading platform, while The Royal Mint will take care of the hard stuff. David Janczewski, director of new business at The Royal Mint says: “Distributed ledger technology is a game changer and supplying gold on a blockchain has been on our minds for some time.” CME Group’s digital trading platform will operate 24/365. There won’t be management fees and ongoing storage charges; RMGs will offer ownership of the underlying gold with the option for conversion to physical gold by The Royal Mint with zero storage cost. The initial amount of RMG at launch is expected to be up to $1 billion worth of gold, with more issued subject to demand.

Granted, Janczewski does go on to say that The Royal Mint’s next ambition is to “develop the platforms to be able to connect to the CME network and trade gold,” which is not something you can do on your own even if you do have a gift shop, but the point stands. The selfassessment test for working out whether you’re keeping pace with innovation is not (for example) “do I know what DLT stands for?” or even, “did I understand the IT team’s latest presentation?” but “how many partner companies do I have in my distributed innovation initiative?” We’re not “digital immigrants” any more, however senior we might be in our understanding of social media, because technology is contagious. But we are travelling with our partners and customers into unexplored territory, pushing back a digital frontier. Okay, this is all getting a tad too hyperbolic. Again, so what? How do we win in a collaborative environment?

CIRCLING THE WAGONS

Among the most conspicuous exponents of distributed innovation is the R3 consortium. Most recently (and conveniently for our thesis today), R3 took the step of making their Corda smart-contractbased distributed-ledger platform open-source from end-November 2016, thereby “granting the global developer community universal access to its source code to encourage collaboration, review and contribution to the platform”. [Note: this may be obvious, but just in case. If you’re using Corda, your information remains private.]

Discussing R3’s decision to go open-source, Dave Rutter, CEO, R3, made a universally applicable point. Rutter said: “The successful application of distributed-ledger technology to financial services relies on new solutions being able to integrate and work seamlessly with each other, otherwise today’s disjointed infrastructure will simply be replicated with different technology.” Got it in one. We’re building a new infrastructure for an entire industry, not just repeating ourselves.

Before R3’s open-source announcement, there was the news that Calypso Technology would be partnering with R3 to develop capital-markets applications on Corda. Before that, we heard that R3 was developing a proof-of-concept for a shared KYC service with ten global banks, and if you delve into the archives as far back as a few months ago, you fi nd a range of disparate bodies including both the Monetary Authority of Singapore and the China Foreign Exchange Trade System partnering up with R3.

Not that it all goes one way. Coindesk ran an opinion piece a while ago (late November 2016) commenting on rumours that one, two possibly three banks were leaving the R3 consortium and suggesting that “participating in a consortium is not a natural fi t for investment banks, either in terms of style or objective.” The departure rumours went on to be reported more widely, as news, but the banks in question remain conspicuously engaged in – how does one put this? – blockchainrelated group activities. Styles change.

GABI gears up for CISE Global Advisors Bitcoin Investment Fund, known to its friends and investors as GABI, has added a range of new features. GABI’s own performance figures show a YTD (to end-October 2016) net gain of 48.12% (37.42% for GABI’s first full year, 2015), so maybe we should pay attention. GABI’s manager can now engage in cross-market arbitrage, futures-to-cash arbitrage, coin lending and leverage. Via an account with Interactive Brokers LLC, GABI can also take an interest (up to 25% NAV) in non-bitcoin commodity futures contracts such as oil, metals and currency pairs. Not only that, but GABI can now trade in Crypto Delta One securities (CRYDOs), which give synthetic exposure to the underlying price of bitcoin in the way that CFDs operate in the equity market. Why? GABI’s new powers come as part of an initiative to prepare the fund for a listing on the Channel Islands Securities Exchange (CISE), which was projected to happen, frustratingly, at around about the time this item was being written. Find GABI at www.globaladvisors.co.uk.

Probably the most crucial point about blockchain is that it isn’t the objective of all this effort. We’re past the blockchain. In this month’s Q&A interview, Dave Pearce at the NXT Foundation talks about blockchain-based FX trading in terms that suggest a very different activity from what we’re doing today. Pearce says, “Blockchain can offer fi ntech systems, banks, FX, everybody a way to replace all of their legacy systems in one relatively easy step. It can not only replace legacy systems, but offer them extra economies – for example, by throwing away the entire concept of needing a back-up strategy. Every single node on a blockchain is an entire back-up system.”

There’s a level at which this is obvious – if it’s anything, blockchain is a record-keeping system, after all. But there’s a deeper level at which anybody who has ever used (for example) a home computer is hard-wired with an absolute imperative to back up work on a regular basis. Let’s use that as a measure of the depth of the assumptions that the blockchain could bring into question. If we’re even able to think about life without back-ups, how much further could our thinking go?

We win, in this – note – clearly defined collaborative space, by not being the stand-out loser. We’re circling the wagons, if you like, or perhaps it would be more accurate to say that we’re sharing each other’s discussions (as distinct from just listening in), to be sure of not missing anything. The art of industrial diplomacy matters much more, these days, than the darker ‘art’ of industrial espionage ever did.

Industrial diplomacy is all about the partnerships, the meetings of minds, the formal discussions and the conversations by the proverbial water cooler. But crucially – it’s about listening as much as it’s about talking.

Assets in currency form Not everything trades as easily as a modest block of USD – yet. We’re not the only people talking about blockchain, and portfolio construction is going to get really interesting when you can trade an apartment building at the click of an algorithm. Real-estate investment firm BrickVest has filed a provisional patent to use blockchain as a fully compliant repository system; the aim is to “enhance BrickVest’s systems and controls above the market’s antiquated legacy systems in an increasingly rigorous regulatory environment.” Emmanuel Lumineau, CEO, BrickVest, told us:: “Property Investors are becoming more familiar with blockchain and many can see the transformational power it will have on the sector.” The fi rm’s recent market research suggested that 56% of institutional investors expect the real-estate industry to adopt blockchain technology for property transactions. Costs, transparency, compliance are among factors cited here. What’s really interesting, though, is what this implies for the future structure of markets. If your apartment block can shift as quickly as that USD exposure, you’re going to start seeing opportunities everywhere.

THE UNIVERSE OF FIRMS

It’s a sign of the times that there are conferences. In fact, it’s a sign of any time you like that somebody, somewhere, is urging you to register for the early-bird VIP ticket to some kind of talk-fest about the thing you do all day. But these days, the serious business case for getting out there and networking is stronger than it ever was. This issue of e-Forex will be hitting the streets in good time for London Blockchain Week, 20th to 26th January. These words are being written not long after the inaugural Blockchain for Wall Street conference on 29th November 2016. That was a serious event. “Today I went to a blockchain conference where just about everyone knew what they were talking about,” tweeted Preston J. Byrne, COO and general counsel, Monax Industries, immediately afterwards.

Rosario Ingargiola at Blockchain for Wall Street

Among the sponsors of Blockchain for Wall Street was OTC Exchange Network. Discussing his own experience of the conference, OTC Exchange Network’s CEO, Rosario Ingargiola, says: “I continue to be surprised at the breadth of firms that are at events like this. I met people from major law firms and consultancies that serve Wall Street, to many major banks, to major mutual fund companies like Vangard, and major technology firms like Hitachi, NEC, IBM, and MSFT. This is not just a bunch of start-ups in the space building cool stuff with Blockchain. It’s the universe of major firms.”

For any corporate loners out there, that’s a telling phrase. Ingargiola continues: “Blockchain is about much more than just cost savings, it’s going to power whole new ways of doing business and it has the potential to power all together new levels of collaboration and openness as well as accelerate many processes. Wall Street should look to embrace ambitious ground-up recreations of existing business models that bring benefits to all participants.” You may detect a degree of enthusiasm here. Given the overall direction that this article has taken, it seems appropriate to give the last word to Mr Ingargiola.

What should you do at your next conference? “Take a look around and realize there is a reason why the very senior people from every major firm you can think of are sitting next to you. Don’t get left behind, make a contribution to this movement and help advance the state of the art.”

Got that?