Our investment in Baton — the non-blockchain blockchain
Digital assets and the infrastructure surrounding their trading, settlement and custody have come a long way in the last couple of years. Although we’ve kept a close eye on the astronomic rise (and subsequent fall) of popular crypto currencies and the adoption of distributed ledger solutions… we’ve been, surprisingly for a fintech focussed fund, yet to make an investment in the space. Baton is our first blockchain investment — and at the same time it isn’t.
Let’s start by clearing up a common misconception; Baton’s value proposition is not blockchain. It is not a public tokenised asset ledger. It is barely a distributed ledger as it does not attempt to digitise assets. The way we think of the proposition is that it’s an orchestration layer between existing ledgers that forces a synchronous workflow.
If you can’t beat them, join them…
Blockchain initiatives have the potential to massively reduce operating costs by cutting out heavily manual post-trade processes including confirmations, settlement and reconciliations. Industry participants know this and have invested significant time and resources in trying to bring these projects to life. In our view, the main adoption challenge to such propositions is that all participants need to agree on a protocol or standard. This is already difficult across banks where most are developing their own standard— see Utility Settlement Coin, JPM Coin, Deutsche Boerse & CommerzBank — but it is outright impossible if we expect cross-country or central bank co-operation. The other often overlooked point is that most frequently traded instruments such as cash, equities and fixed income are already digitally represented in an institution’s ledgers. Although I’m sure some are still clipping physical coupons in a dark back-office, locking those assets in a blockchain doesn’t solve the bigger balance sheet and pre-funding challenges faced by financial institutions.
… but find the path of least resistance
The team at Baton understood that the path of least resistance was to keep the assets in existing ledgers, connect to them and build a distributed overlay that would offer a number of the advantages that come with blockchain technology. Namely synchronous settlement of a double legged transaction and real-time visibility into account balances. This proposition doesn’t require a network of participants to be valuable. In fact, the first project Baton completed helped HSBC settle over $250bn of internal FX transactions driving significant balance sheet and operational efficiencies. Additionally the flexibility of the platform allows the team to tackle other use cases in securities and collateral settlement. The firm is already working with JP Morgan and CME to provide a real-time view of collateral accounts and one-click settlement for margin calls.
The disconnected connected future
Of course we can’t be blind to assets moving away from existing ledgers onto new blockchain platforms. As that happens a number of the operational challenges that financial services firms face today will disappear. The instinctive reaction to this would be to assume that Baton’s solution would have a limited shelf-life. However, we believe it is unlikely that all the world’s assets will be held in a single distributed network. Instead, our expectations are that multiple networks will coexist and inter-connectivity between them will be a crucial element of global market structure.
Baton’s platform is agnostic to the type of underlying ledger. Whether traditional or blockchain-based, interoperability will remain a key requirement for financial services firms going forward. By keeping an eye on industry developments and being around when the pieces fall into place with more widespread blockchain adoption, Baton is future-proofing their proposition.
Getting the right people in place
We’ve known the team at Baton for a long time — Mark B, Rezso and I spent a few days with the team in the fall of 2016. While the stage of the business wasn’t right for us at the time we kept in touch with Arjun and were impressed by his team’s ability to deliver high-performance enterprise solutions that institutions were moving into production. It was one of the few examples of meaningful adoption of distributed ledger we saw in the industry. We knew he had already built a strong technology team and were pleased to see the bolstering of the management team with industry veterans which add credibility and their network to the proposition.
The firm has brought on other industry experts to deepen the bench. Alex Knight, previously Head of FX Prime Brokerage at Citi, has joined as Head of EMEA leveraging his deep industry knowledge and connectivity to expand the firm’s activities in Europe. More recently, Tucker Dona has been appointed Head of Business Development. Tucker joined the firm from JP Morgan, where he had been running the collateral and clearing business for over 17 years.
We are excited to support the team at Baton with a $4m investment to support their expansion into Europe and we look forward to driving engagement with our partner network.
