Standardisation of messages across entities and platforms is extremely powerful. Standardisation opens the door to solve optimisation and cost challenges that many financial institutions face. An example of this is what the FIX protocol has done for the electronic trading market. Without FIX there would be no basis for High Frequency trading or other strategies where speed and efficiency matter. Another example of where standardization has improved efficiency and cost is SWIFT. Before the consortium was formed, fragmentation within the global payment network made payments a lot more expensive than they are today for cross border payments.

In the digital currency space, we are far from a standardised solution. There are many innovative ideas and technologies all trying to solve various issues, but no road leads to a solution that solves all the challenges that financial institutions face which is reducing cost and increasing profit. Due to regulation, particularly BASEL III, banks are required to manage their capital levels more stringently meaning that businesses within banks that depended on a free flow of leverage are now under stress. Due to this constraint profits are shrinking and so there is a wider focus on cost reduction across businesses. One way to do this is looking at technology and bringing in solutions that can save investment dollars while allowing the businesses to scale. This applies to both Commercial/Retail banking as well as the Investment bank. But going back to the point of standardisation... Banks across the street have a cluster of different solutions built on different platforms. Some banks are so advanced in their tech that they even have their own proprietary coding language that they use to build solutions. Others are so far on the other side of the spectrum that they only outsource their technology to a handful of monolithic software companies that are so far removed from the details of ever evolving businesses. In either case, business processes are mature but there is a definite divide in tech platforms across the street. Therefore, as efficient a business layer may be, the tech stack that supports these businesses vary in quality, scale and function and do not allow for interoperability. Implementing a shared network with an agreed responsibility amongst stakeholders in maintaining standards while remaining competitive would provide a playing field that could further enhance blockchain technology while benefiting customers/clients at the business level. This could also allow banks to focus more of their investment dollars on the business layer and less on the actual processing stack of their infrastructure. It is important to understand the banks at a group or wholesale level to really see how the businesses interact. When this becomes evident, one will realise that there is a lot duplication and fragmentation holistically. To really harness the power of the blockchain as it applies to the banking world, one must understand how incompatible and duplicative the banking infrastructure really is.

As we look ahead, in today's environment, it feels as though the world is gaining a lot more awareness in the power of what Satoshi created with respect to the idea of a blockchain and how that can dis-intermediate entities from a process, but we’re not yet able to fully realise how to manifest this tech in a way where there is mass utility. In this regard, Banks are spending a lot of money investing in Innovation Offices, running Hack-a-thons, and allocating dedicated resources to understand how the blockchain can be implemented in a fundamental way that will allow the first mover (i.e. the first bank) to save costs, drive efficiency and charter into new opportunities particularly as it relates to the broader scope of FinTech.

This paper will attempt to suggest ways in which Banks and other financial institutions can implement a model that avoids the classic “analysis paralysis” which a lot of these teams are facing within the Banks. The main disconnect is that there are very few people who really understand the technology vs. those who really understand a Bank’s business. This paper will attempt to appease to both audiences making the suggestions poignant yet detailed enough for readers from both sides to appreciate.

The key is to identify an area within the Bank that is more receptive to transformative change and is looking for solutions to help reduce cost and manage their various risks while being able to scale quickly with changing market and regulatory conditions. When looking at the Bank in this light, you are immediately drawn towards the Investment bank NOT the Commercial/Retail bank where most of the FinTech budget sits these days. Within the investment bank, there are many areas that can benefit from such technologies like blockchain. For those of you who have an understanding of how the financial markets business of a bank works and a fundamental understanding of how digital assets and the blockchain work, you’ll appreciate the parallels I draw below:

Securities = Digital assets/tokens Trades = Transactions in the Blockchain Positions = Valuation based on price feeds/market data Booking systems = User Interface/Blockchain Settlement/Payment systems = Ripple

What I am insinuating there is potential for blockchain tech to integrate with the Ripple platform in what I would consider a 5 year nirvana state for any Bank, let’s take a closer look at points 1-4 first. When looking at the first 4 points, we need to ask ourselves the simple question of security and access. In other words, what is the right framework to build upon a public network, a consortium or a private network? I am a proponent of banks building a consortium blockchain or what I would call a walled garden where the wall is low enough for users to look at some things BUT high enough where they can’t just walk in. An example of this is shared market/static data vs. meta data (which I believe will become much more in value than market/static data in the near future but that's another write up). SWIFT to some extent works like this where common users of the global payment network are allowed to access certain fields on a SWIFT message while not being able to access other fields. The FIX protocol is more of a Fort Knox model where it is very confined. Assuming the implementation of a consortium of banks agreeing to a standardized blockchain, we would then have a palatable network to build upon. What and how we build on top of that network is the most intriguing part of the solution.

The simple concept of mapping real world assets to the digital world is the first part I would look at. Decomposing a security, one can conclude that it is just an issued certificate by an entity that holds value which is determined by a market. There are beneficiary owners of those certificates and those investors can chose to increase or decrease their holdings. There are many other assets in a bank that have similar properties. In particular vanilla or flow products where there is an entity that issues certificates outlining the economics of that investment, entitlement, and settlement terms are all just another form of a security in that there is a secondary market to transact with buyers and sellers with a regulatory framework that governs how these products are exchanged.

The process of exchange, validation, settlement and reporting are all high cost functions these days especially as regulations keep changing adding new requirements that businesses need to factor in. With the implementation of a standardised consortium blockchain (meaning standardised processes, functions and assets all within a consortium blockchain), various entities or stakeholders can share the costs and capacity associated with the network. Assuming this to is built as a quasi open source platform, in other words, developers who have access to the source code are fungible across the various entities/stakeholders involved in the consortium, then the funding impact would be marginal with greater economies of scale achieved.

In theory what I am suggesting is that assets within the banks be digitally standardised and represented in a consortium blockchain that is a shared resource across a group of stakeholders. In many ways, this has a similar proposition to what SWIFT already does. The key difference is that SWIFT is just a messaging protocol that sits on top of the banking payment network. SWIFT only allows for passing of debit and credit messages within its network, there is no asset exchange, asset valuation (market to market process) or settlement. In the model I am proposing, assets are exchanged, valued (price feeds/market data integration) and settled (confirmation of an exchange of assets). Subsequently, the settlement that I am referring to is different than a payment. A payment is one part of the settlement life cycle. For the purpose of this model that I am proposing, a settlement is just the confirmation of an asset moving from seller to buyer including the passing of SSIs (settlement instructions) NOT the actual payment that comes after. The payment process would be considered an external event in my model where it would be done through Ripple or in theory some other integration point that can handle a digital to fiat conversion (again, without reinventing tech, I’d push Ripple to handle this).

The question of how a real world asset gets digitized is a fair question. What this would require is some work to create a standardised front end business layer for teams to book trades/transactions into the network. The booking event would be the creation of the capsule/token which would contain the initial DNA of that trade/transaction. The capsule then moves through the network and passes various life cycle events like validation, amendments, settlement, etc… all of which is processed within the blockchain by the known Validators. So in this case, one could consider a trade or transaction in the system as a digital representation of the real world trade/transaction with the benefit of it being interoperable and transferrable.

In the bigger picture of things, what we are ultimately talking about here is a potential global real time trade/transaction management system integrated into the blockchain. The significant benefit is really the processing capability of the blockchain running 24x7 which would alleviate some of the global processing challenges that large global banks face.