Innovating with Blockchain Financial Markets

Chain Financial’s Blockchain Financial Markets Blogs, №4

Practical examples are the acid test that can separate valuable innovation from vapourware. Here are eight selected examples of innovating with Blockchain Financial Markets that we are working on at Chain Financial. Innovations 1 to 4 are examples of doing old things better and innovations 5 to 8 are examples of how we can do better things.

Doing Old Things Better

Blogs №1, №2 and №3 in this series, have set out that Blockchain Financial Markets can often help us do basically the same things as Traditional Financial Markets but more efficiently (i.e. cheaper) or more effectively (i.e. with quality improvements) or both. Four of Chain Financial’s innovation projects that fit in this category of innovation are:

Innovation 1: Closing Gaps in the Record of Clean Money

The provenance of people’s legitimate source of funds and identity can now be maintained outside of the Traditional Financial Markets system. If stores of value outside of Traditional Financial Markets are recorded in Blockchain Financial Markets, we should reduce costs when funds attempt to ‘re-enter’ the Traditional Financial Markets system as there will be no ‘gap’ in the record of clean money.

Innovation 2: Higher Quality Clean Money Checks Applied for Less Total Cost

A valuable side-effect of Blockchain Financial Markets is that they lead to an effective system-wide collaboration on anti-money laundering. By pooling our resources we will be able to do higher quality checks (i.e. more biometric and geolocation tests) at a lower total system-wide cost. In other words, we can do it once and do it right.

Innovation 3: Cost-effective Exchanges of Fiat Foreign Currencies

As Blockchain Financial Markets will have programmable fiat tokens (i.e. Stable Coins with identity built in) denominated in multiple fiat currencies, they will provide a cost-effective method to facilitate foreign currency exchanges, from say NZD to GBP. This can be applied for one-off transfers of value, but similarly this functionality can be bundled in smart contracts to provide utility such as synthetic cash-pooling for multinational entities.

Innovation 4: A Better Money Supply

When Blockchain Financial Markets include the issuing of Sovereign Tokens it should result in a better money supply for us to use. Some key improvements could include:

  • Using the blockchain technology to further reduce the risk of counterfeiting money.
  • Macro monetary supply growth limitations could be directly programmed into the money supply to enhance the reputation of the currency and preserve the value of assets denominated in that currency.
  • For pegged currencies, the practical, and in some cases antiquated, mechanisms that are used to maintain the peg could be literally programmed in. For example, the HKD Blockchain Financial Product could be wrapped around a USD Sovereign Token.
  • Sanctions and other trading restrictions could be pro-actively programmed in at a money supply level. In other words, specific individuals could be prevented from receiving programmable money. This is a massive shift from a reactive approach to a proactive approach to enforcing economic sanctions.

Doing Better Things

One of the most exciting parts of Blockchain Financial Markets is that they enable us to do better things. Four of Chain Financial’s innovation projects that fit in this category of innovation are:

Innovation 5: Digital Escrow Services and Blockchain Business 2.0

Digital escrow services will be important in building trust. Digital escrow services are smart contracts that move and hold blockchain financial products including programmable money based on programmed logic and pre-defined signals from people and entities. The cost reduction impact compared with traditional escrow services is significant and will impact:

  • House Purchases — as an alternative to lawyers’ trust accounts.
  • Rental Deposits — as an alternative to deposits being held by landlords or deposit agencies.
  • Milestone Based Payment Contracts — as a better way to manage the risks around delayed delivery or non-delivery in construction contracts.T

The even bigger benefits of digital escrow may relate to the ability to economically use escrow services in a wider range of circumstances. The effective reduction in cost for escrow functionality will enable trust to be built into micro-transactions. For example, the payment for delivery services could now be conditional upon successful and timely delivery.

The biggest potential application for digital escrow services is likely to be in relation to Blockchain Business 2.0. Typical in Blockchain Business 1.0, an application specific cryptocurrency was issued which provided a current or future ability to pay for access to utility. These businesses can now be reimagined as a combination of an application layer managing user experience, a smart contract layer recording the business logic, and a fiat denominated stable coin layer holding stores of value. Blockchain Business 2.0 could deliver: reduced price volatility, reduced transaction complexity/risks, and reduced regulatory uncertainty.

Innovation 6: The Democratisation of the Dark Art of Treasury Risk Management

Derivatives get a bad rap. They are often misunderstood, because they are often misunderstood. When derivatives, such as interest rate and foreign exchange derivatives, are issued as programmable Treasury Management Tokens, we will be able to greatly democratise the dark art of treasury risk management.

Firstly, the conduct risks associated with the ‘misselling’ of derivatives could be controlled because the people and entities without sufficient credentials to understand these products could literally be prevented from receiving these blockchain financial instruments into their digital wallets.

Secondly, the difficulty barrier to good management of owning derivatives can be dramatically lowered by directly attaching financial utilities to the Treasury Management Tokens. Holders of derivatives will no longer be left wondering how to use their entity based systems to value, account, tax and management report their derivatives. Instead derivatives will come with prepackaged utility to ‘look after themselves’.

Thirdly, boards and senior management can expect innovations to emerge that directly link their risk appetite to the Treasury Management Tokens purchased. They will not be required to specify which combinations of derivatives are required to make their intentions come to life. In Blockchain Financial Markets, instrument selection is a detail that can be largely automated and obscured from the user. In other words, the dark art of corporate treasury is about to get much more user friendly and outcomes focused.

Innovation 7: Ethical Investing and Spending Based on Your Ethics

In Blog №2 I defined a system wide role of responsibility in a rather narrow sense — preventing the proceeds of crime from entering the Blockchain Financial Markets ecosystem. I promised to revisit this and share some practical examples of how your personal ethics can come to life in Blockchain Financial Markets.

Blockchain Financial Market assets can hold specific data flags recording their qualitative factors. As such, Security Backed Tokens can record verified data on whether the underlying company uses palm oil in their products, whether they manufacture using child labour, whether they carbon offset their footprint, whether their board and executives are diverse, whether they are associated with the production of weapons, whether they sell unhealthy foods, their level of political donations, etc… Similarly, our Blockchain Financial Market identities, which are visible to only us and our Identity Custodian, can record where we stand on these ethical issues — they will represent what we care about, and in what ways, and with what trade-offs (if any).

The costs of constructing a tailored portfolio that matches your individual ethical positions will therefore dramatically reduce. This will bring a step change to the impact of ethical investing on capital markets.

As a side note, it may be possible to bring the same levels of controls to your day-to-day spending of your programmable money. Perhaps it will be possible to literally prevent yourself from buying products that go against your chosen ethical fingerprint..

Innovation 8: Finance and the Good Society

Nobel Laureate economist Robert Shiller has highlighted that finance and a good society are not mutually exclusive. When finance has an amplified impact from Blockchain Financial Products in may better help us create a good society.

It may be possible to move prudential controls from a banking level of compliance to an individual person’s ‘balance sheet’ level. We may be able to prevent people from getting into harmful debt spirals.

Society might (rightly in my opinion) decide that targeted support should be put in place to ensure that people are able to participate in Blockchain Financial Markets and access the magic of finance. Essentially this targeted aid would be about improving people’s balance sheets, where required, to a level where they have a real opportunity to access to invest in themselves and achieve success for themselves, their family and their community.

Next Step — Get Involved!

I’m passionate about the innovation possibilities unlocked by Blockchain Financial Markets. I’m hopeful that the eight examples shared here have only just scratched the surface of the innovations yet to come. If you are keen to help the boat go faster, please join Chain Financial’s growing ecosystem. Together we can discover how to magnify the magic of finance.

About Dave Corbett

Dave Corbett is the CEO and Co-Founder of Chain Financial. Immediately prior to founding Chain Financial Dave Corbett was a banking & capital markets Partner at PwC for more than nine years based in London and Auckland. Dave has nearly two decades of professional consulting experience servicing clients in key markets globally. He is an expert in financial instruments, capital markets, financial engineering and innovation.

Dave Corbett, CEO & Co-Founder of Chain Financial

About Chain Financial

Chain Financial is a global company based in New Zealand focused on enabling growth in Blockchain Financial Markets. Chain Financial is both building the technology to enable Blockchain Financial Markets and also collaborating with traditional and emerging entities around strategic opportunities in the emerging landscape. The founders of Chain Financial are Dave Corbett, Centrality and Intranel.

About Centrality

Centrality is a New Zealand based blockchain technology company that is a global leader in UNthinking the digital landscape for a decentralised world. They specialise in providing developers and businesses with the tools to create blockchain-based products and services. Aaron McDonald, Centrality’s CEO, is the 2018 EY Technology and Emerging Industries Entrepreneur of the Year.

About Intranel

Intranel is a New Zealand based emerging technology consulting and engineering business. Their business and development teams are experienced at accelerating technology delivery. They have completed significant assignments delivering technical growth, operations management and regulatory compliance for blockchain financial market entities.