The 1st BSN Global Tech-Innovation Summit | Vinay Srinivas: Blockchain at Financial Institutions Full Script
On November 27, 2020, Vinay Srinivas, Head of UBS Quantitative Analysis and Digital Transformation in APAC region, delivered a keynote titled Blockchain at Financial Institutions at the 1st BSN Global Tech-Innovation Summit in Wuhan, Hubei Province.
The full script is organized as follows (some minor edits were done):
Hello everybody! My name is Vinay Srinivas. I lead up the quantitative analytics for APEC global markets at UBS. I’m also in charge of the digital transformation initiatives at UBS global markets in APAC. As part of my job, we do a lot of modeling and a lot of data analytics development. And also, we look at a lot of fintech space. So, thank you for giving me this opportunity to share my thoughts on how things would improve, especially those focused on BSN and how it will actually help the financial industry.
I believe you got other speakers from the financial industry, but it’s more on consumer banking, retail banking, or the digital banking side. From my perspective, as I said, I’m more from the markets — capital markets background. But as a typical investment bank, I would say there are usually three streams or four streams. There’s the retail banking that we’ve already covered with some other streams. We got the asset management. There is the creation of funds, still getting into the institutional space. Then we got the private banking or wealth management, as some people call it, that is, again, for slightly retail oriented, where we actually have a lot of impacts with the high net wealth individuals. And finally, and this is what I specialize in, the investment banking side. So, now we have two areas. We have the global markets or the markets area where we actually do all the trading in securities. We build on structured products. We build our own financial assets. On the other side is investment banking, the actual banking side — work on the mergers and acquisitions, bringing companies to IPO and things like that.
So, today’s focus for me would be completely towards the market side of things and why we think the recent changes in the financial technology, especially in the distributed ledger technology, and why it could be pivotal for us in the coming years.
So, one of the problems that happen in the financial markets is that in different banks, investment banks, people spend a lot of money in building systems and this becomes a technology race essentially. So, if you want to have the fastest systems, you want to have the safest systems and you want to serve your client’s best. That’s the only way. And the more you spend, the more likely you’ll diverge from between different products. You might end up with different tools that might be doing similar things. But there are no standards, there are no standards coming out of that in a bank, let alone amongst the banks.
So today what we’re gonna cover is that what this digital transformation is for my job and how we can achieve more with less. So the marginal cost of developing new things is gonna be smaller and smaller as time proceeds. Only then the banks can do well and serve their clients best. So setting that as the background, I’ll talk about where the distributed ledger technology really helps us.
So, the main thing is, as I was saying that supposing somebody could be doing a bond business, somebody could be doing the equities business, somebody could be doing FX (foreign exchange) business. That’s fairly different. So what do you end up with? The markets themselves are very fragmented. Nobody’s combining them. Because the markets are very different. The banks go and build their own kind of silo systems, which do not actually conform to any standards. And then when banks talk to other banks or their clients, that game problem is that everybody is building the same files and links again and again. So, what’s gonna happen is that the technology costs the building of their own tools, and everything is just it’s very expensive. It’s not sustainable in the long run. So in the distributed ledger, the main things that we see for us are the, as people call it, blockchain is that we’ve got from a markets perspective, we got three big items that we always think about.
Actually, we always want to have a way to tokenize identity. So, tokenization is a big theme. You have a digital version of anything that you do as you digitize a product. The entity you can minimize the cost there because you’re actually not storing paper. You’re not actually — you’re not the reconciliation that you build between you and your clients or between banks and banks. It’s very, very expensive in terms of maintenance and building these new systems. So going back to the tokenization part, we can be tokenizing the identity itself. How can I actually go? And with a very secure way, I can store my identity in a database. And we could use the data identity between each other’s to talk.
The second is that you can tokenize the assets. So, if I have a bond, if I have a Tencent share, can I make it into a smaller share? And I can still store a certificate as a digital certificate rather than an actual physical, the electronic one, that action needs to be transferred around. But I can store it in a single database somewhere. Similarly, you can tokenize cash as well. And this is where the central bank, digital currency, DCEP, and all the initiatives are happening. Some of the banks have their own digital version of the currency as well. It allows that this all started evolving and it’s gonna gain more and more base going forward.
And the fourth item that I wanted to add was the workflow. And the main thing is the bank’s, there’s a lot of intermediation happening at various systems and processes. In that process, we need a workflow. And this workflow is always built. And this is where we spent a lot of money on the technology space, building workflows for how we talked to a client, how the client talks back to us. How do we give clients the investment they’ve made? How do we give them the returns on the investments and so forth? We spend a lot of money on that. So when this came along, the distributed ledger actually provides us a very good way to have multi-party systems. Everybody looking at the same copy of data, there’s only one single data point. You’re not copying data from bank A to client B and then we’re trying to reconcile. Did I pay you right? Did I give you the right calculation? So, now with this is where the smart contracts are gonna be really, really important for the financial industry.
So the interesting thing about the financial industry is that the kind of products that we have could be as complicated, could be as simple as a stock or a bond. But the bond pays coupons and the stock pays dividends. You need to model all those things. You need to say, ok, how does client B cannot be seeing client C’s positions or stocks with bank X. How do you build all those things? This is where the smart contracts in building the security bill, modeling the asset life cycle, and how does it actually get issued, how does it actually get board, how does it actually get into custody, how does it actually get the dividends…all those things that need to build. And this is where exactly the big impact for the financial industries.
Okay, so I’m going to build all these smart contracts and everything. So what’s the next step for me? I still need to have the database, but no. We’ve got a problem now. I go and say, I’m gonna use Ethereum. Somebody’s gonna say, we’re gonna use Fabric. Somebody’s gonna say use Corda. And this is where every bank and every financial technology player is actually worried. Ok, I’ll choose a distributed ledger protocol or technology right now. How am I sure that this is the technology that’s gonna be there in three years? How am I gonna make sure that I can talk to my counterparts, my clients, and this is where all the insecurity comes in that are we doing the right decision?
And that’s where I think one of the things that we really, really are looking forward to is interoperability that BSN is actually working towards. So that’s gonna be the key thing for BSN. So BSN is actually focusing on these smart contracts. I know they are looking at the interoperability using these smart contracts that can be deployed on multiple platforms. And that is where I think the value is. So, I don’t need to when we go and build systems, we don’t need to worry that this might not be the technology that the other my client might be using. And we cannot talk to them. And that’s where the interoperability becomes really important because then I can think only about my stock, my bond, my dividend, my coupon and that’s where the value of the BSN comes in. Interoperability is one thing.
Another thing is also connecting it up, for all of us. If I were to do it myself, I need to go and build a link between me and my client A, I need to go and build the same link between client B, or else I need to get them all into my network. But what happens is — there’s another bank Y that is also trying to do the same thing. So, either we go and all agreed to build one single network that we can all talk to. But then this takes years and years. All banks need to agree. All clients need to agree. So there’s no kind of standard.
We’ll end up with everybody trying to do the same thing again and again and trying to, okay, this my network is better, you should join mine. Things will be very difficult. So, coming up with a standard network that actually is applicable and is achievable and is easy for everybody to integrate is kind of a primary thing for the financial industry. Especially in the markets industry, where we have a typical stock settlement will have at least four or five players. They’ll be exchange; they’ll be the clearing. They will be the custodian, they will be the counterparty. It’s so many things that have actually happened. It’s also we need to go and build regulatory reporting. All those things that every bank do it again and again on their own. They build their own system. So having one single network, but the custodian with the clearing, with the exchange linkage.
What BSN actually is that it gives us a new network, as Mr.Yifan He was mentioning that it is the new Internet. And just like when we had the HTTP and TCP on those things came in. There was there what we provided a wire. But we did not actually provide this security, we could not provide that they could talk the same language in terms of the assets. And this is where the BSN is gonna come in very handy. It’s not gonna be a slow process. There’s gonna be a lot of challenges. But this is what every eventually everything will evolve. And this is how we gonna settle down.
So having said that, what are we doing in that space? Obviously, we’re looking at all the smart contracting. One thing that happened is an organization that actually talks about how over the counter transactions, So, whatever is not listed, how over the counter transactions need to be settled, how they managed, how their life cycled. What is the interaction between different counterparts is how does it like they have defined the rules. They’ve come up with this set of rules called the common domain model, how that will work on the distributed ledger.
And this is where, again, we’ll with the BSN we have the base. Everybody is looking at smart contracts. We have a standard there as well that CDM is the standard, Common Domain Model is the standard. How do we actually stick to that and build the, now we got a place to deploy these things. That’s where I think all this starts coming together. Other things that will actually do allow us to if now that you have a network, you can connect the BSN across multiple countries. Now you can actually start facilitating cross-border transactions. Now I’m obviously there’s jurisdiction and legality. And there but that’s one you solve it only once, I don’t know how to do funds at UBS. And somebody else has to go and do from another bank. That will be solved in one place. And that’s where you say, okay, we got this. The efficiency achieved with this is gonna be huge in terms of all the interactions that we have. So that covers the so what just as a summarizing what I’ve been talking about is that we get the digitalization of all and tokenization of all our assets and identities is inevitable. That’s the only way things will be smooth. And there’s the only way you can have either disintermediation.
Or the workflows need to get simpler. And for that to happen, we will need smart contracts. But the smart contracts happening on their own would not solve the problem, you still need a network. And in that case, this is where the BSN is a very, very, very noble initiative that is actually trying to set a standard, is trying to set to build a network that actually everybody can talk on. Having said that, there is gonna be over the years. I know there’s a vision there. And this is a very sound vision. It will take time to build. And this is why it’s very important for banks like us to collaborate with the BSN. We have our own inputs, our own domain expertise on the technology. So BSN will give the technology layer. But the DApps and all those things, the domain-specific applications. And the domain knowledge comes from the banks. And this is where I think we need to start collaborating more and more and start building tools.
But I think there are two angles there as well. Are we gonna go for the retail space? Are we going to just go for the institutional space? I think institutional space makes sense. But again, what it also gives us from a bank perspective is, for now, if I have to do some things with one of my smaller or medium Enterprise clients, it’s very difficult for me to build connectivity to them. So if you actually making the BSN more affordable because it’s a cost-sharing happening there, then our smaller and medium clients and medium-sized clients can come on that and they can avail our facilities. So the cost of servicing a client goes down and the cost of acquisition and client acquisition goes down. And that’s why it will be the financial service will be much more spread out.
So there’re these three points. So setting up a network that’s reducing the cause, the cost of acquiring a client and servicing a client, and forcing interoperability between different ledgers gives more choice to the banks. And also more focus on the domain of smart contracts is what BSN is gonna bring for us. So I think that’s three points that I wanted people to take away from this. But that’s the major benefit that BSN is gonna give for us. And we are very excited about all this. Thank you.