Blockchain is changing the finance paradigm in 3 directions
Keynote Blockchain Week, Ho Chi Minh City, 7 March 2018
by Alex Medana
Thank you for having me here today, it’s a pleasure and an honour. I will try to give you some of my views as to where blockchain is heading but before I want to clarify a couple of things.
First of all, I will use blockchain here generically sometimes meaning blockchain, sometimes DLT and sometimes blockchain + DLT + smart contracts. Just bear with me.
If you are in the blockchain space, you won’t learn anything with me, anyway you won’t learn anything new. I am not here to teach but to make you think.
I am not a technologist and am not an expert especially in blockchain. Please don’t leave though yet, I know another couple of things one of which is martial arts.
I am a post-trade ops guy who has spent 16 years in various banks mostly in prime brokerage and brokerage, and in June 2015 I became an entrepreneur with my first venture, a blockchain consultancy in HK, that was too early too little. It failed, no-one was ready and particularly the tech I could have used.
Let me be clear, I am proud to have failed even if it hurts at the time because it set me up for my current adventure - FinFabrik.
I am not here to sell you any product but all I can say is our company that is 18 months old is re-inventing how financial services are built through a modular platform starting with brokerage and wealth management and yes there is a little blockchain here or there.
Since the time I fell in love with blockchain in early 2015 to nowadays, the tech has really matured whether we think in terms of public or private chains or the various consensus protocols (proof of existence, stake, funds, capacity etc.)
As a capital market ops guy who had a lot of issues well also with data, being all over the place in different silos, formats at different times, blockchain has given me hope that the IT spaghetti can be fixed.
To start with exchanging value or payments was the easiest bit to be done because it is a push mechanism, that is simple to speed up from the current workflows (correspondent banking, FX providers or networks). There are fewer systems and intermediaries in a payment transaction compared to a capital markets one.
I know I am biased but that is where I see the opportunity. To be fair, what I like is the real-time (well, close to real-time anyway compared with the traditional pipes) exchange of value, a bit like if I had some gold, silver or platinum that I would give you in exchange of a few bucks. The transaction is real-time but it is the validation that takes time. We don’t need to know each other, we don’t need any intermediaries and that is powerful.
To me, blockchain is really about data. How that piece of data, transaction, information (Information is data in better clothes, data made more meaningful) becomes truth-like due to what cryptography does to it: immutable, irreversible, tamper-proof. Truth-like because if you have a piece of junk validated on a blockchain it is a piece of junk forever and ever.
Blockchain is very interesting because it becomes potentially the architecture, the data and the workflow which is the orchestration of data. I see three things:
First, the consequence on ID is profound…As you know, there is only one of you, of me, thank god…but the problem is that we can’t prove it, we don’t own “me”.
With blockchain, I have a minted me, a tokenised version of me that holds all the important records and milestones of my life: date of birth, gender, marriage status, address, criminal records, employment history, education, health, wealth, sports and academic achievements etc etc.
First of all, we create that version of me and then most importantly I own it, then I can distribute it to my services providers. I call that centralised decentralisation i.e. an authority creates my ID and I distribute it as I wish. Imagine a world where the power is in the consumer’s hands. If you are not happy with your bank, bosh, you disconnect them and port your ID over to another provider! Account portability and PSD II in Europe could be just the precursors of that movement.
Second which is less interesting or sexy but has a lot of potential for saving incumbents a lot of money: any digitisation of any document (webform, OCR, token) combined with a cashflow automation through the usage of smart contracts create shorter, quicker workflows and it has also the potential to link actors that do not know each other or care about each other today. That is one of the reason why Trade Finance is interesting.
For example if I take anything built with metal, a car for example (there is more than just metal but let’s keep it to that example), who are the actors?
Miners, Smelters, Refiners, Logistics (trucks, ships, containers, warehouses), Commodities Exchanges, Brokers, Banks, Wholesalers, Hedge Funds, Asset Managers, Manufacturers, Insurers, Lenders, Controllers, Lawyers and I am sure I am missing a ton, no pun intended.
Imagine then you not only verify the provenance and track the goods from raw materials to the sold products but finance and insure them at certain key stages or events and all of that with no paperwork or little human intervention.
Thirdly, the most interesting to me personally as well as where we want FinFabrik to be is the tokenisation of real assets for two reasons.
For me, I take tokenisation in a very simple way i.e. a summary or the reference to something else. For example Alex123 refers to me as a client, human, whatever. In isolation it is meaningless but you can unlock a lot of value if you have the key to access or translate it.
Real-asset tokenisation has three levels to it:
Let’s start with a token that represent the ownership of a share in a company or special purpose vehicle that owns a building.
The first level is Primary: you issue a token and somebody will buy it to invest in your project. This level doesn’t alter much of how companies, SPVs, funds are set up and you still have some paper trail particularly in the fund admin size but it creates a wider reach, automates cashflows through smart contracts. Think of it as buy-to-hold digital bearer assets.
The Second is: well, you have guessed Secondary. You can buy and sell the same tokens (from the same issuance) on a platform without any intermediaries as long as there is trust, transparency, recourse and security.
The Third which will take more time as I am sure the regulators will have their say is Tertiary: you can swap between assets of different issuances, values. I can swap the tokens representing my ownership of a plant vs your ownership of a vineyard or anything else. As long as we believe the opposite view (e.g. I believe manufacturing plants are becoming obsolete and that wine markets will grow and you believe the contrary then we have a trade.
No intermediaries, real-time transfer. Loans and collaterals on steroids.
Most people focus on the Asset Backed Securities model that brought the global financial crisis of 2008. I am not disputing the risks but what I see is two huge benefits:
Release an enormous amount of trapped liquidity and wealth. It’s in quadrillion USD: anything OTC, anything held privately can be tokenised. OTC securities, immovable assets, art pieces, jewellery, collectables, etc.
Second, financial inclusion through fractional ownership. Investing in amounts rather than quantities.
Access to financing, investing and insuring are being democratised.
There are 2 billion of unbanked, well maybe 20–25% less (whenever we have the latest Worldbank stats we will know) and there is a strong correlation for me with the financing gap of the informal SME sector. 1.2 Trillion financing gap of which 1 Trillion is in Asia, reaching 2.6 Trillion when adding the informal SMEs sector. If you were to include the unbanked into the financial markets of today and close the financing gap of small businesses, there would be up to 380 billion of new revenues up for grab as per a research in 2015.
Being unbanked, underbanked or even under the poverty line doesn’t mean you have nothing….you may have small amount of cash that is not being deposited and creating value in the financial system, you may have possessions (for example a cooking stove, a juicer, a booth for an informal SME) that can well be tokenised or collaterised.
These two opposite forces of releasing the trapped liquidity and creating a fractional demand create an unlimited new paradigm but I have to say it will happen only if it makes sense for the users. It is not about the tech. It is never about the tech, I know it hurts but tech is just an enabler of a business model.
I always say this: tech has to be useful, useable and more importantly used.
Yes, there will be further disintermediation but I see it as a Darwinian evolution of the markets. Value creation rather than destruction.
Jobs will be created whilst the fund admin jobs will be destroyed for example. C’est la vie.
I talked about ID management, workflow and architecture as well as real assets tokenisation. To me, that is where the blockchain is heading. I am happy to be wrong but we are working on it to be right.
Let’s work together on this new paradigm in a way that is controlled and sustainable away from any gimmick or bullshit — thank you