Traditional Finance ‘Blockchain-ification’: Pie in the Sky or Inevitable Future?
The dream that “everything will be on a blockchain” was a familiar chorus in the heady days of 2018’s ICO boom. ERC-20 tokens sprung up for every imaginable purpose, from pure Ponzis like BitConnect to coffee and cannabis supply-chain ecosystems that — pardon the pun — went up in smoke as soon as the bubble burst.
Five years later, the notion of a much broader range of assets existing on the blockchain is not nearly as far fetched. After all, so many assets are already traded electronically without any actual transfer of physical goods.
In a recent interview on the 1000X podcast, Don Wilson, founder of trading firm DRW and co-founder of Digital Asset Holdings, spoke to Blockworks about the possibilities of the future “blockchain-ification” of traditional finance assets.
He begins with an important caveat: “There are some assets that are physical assets, like nickel,” he says. “You can put nickel on a blockchain, but ultimately the nickel has to sit somewhere.”
“If somebody steals the nickel, then you have a blockchain that represents nickel and the nickel’s not there — and that’s a problem, right?”
“So that kind of stuff is something that still has this intimate link to the physical world that is super critical.”
Many instruments are already virtual
On the other hand, many instruments in finance are already “virtual” in nature, such as equities and Treasurys, he says, “and people don’t usually walk around with their Treasury certificates.”
Wilson says “those assets probably lend themselves more to digitization,” or as podcast host Van Bourg describes it, “blockchain-ification.”
“Right now,” Wilson says, “we’re experimenting with intraday repo using blockchain technology.”
Wilson describes the growing capacity for the digitization of assets built on the Canton Network, a “digital assets holdings blockchain.” The network aims to use permissioned blockchains to bring different bank and financial companies’ applications together, allowing for greater ease of use and security across platforms.
“It enables value to be moved in real-time and even 24/7. And that’s the kind of thing that will make clearing houses more resilient if they want to avail themselves of that technology.”
The current system is clunky
With today’s financial system, wiring money internationally can take hours and is only possible “when the wire window is open,” he says.
Wilson illustrates current limitations with the example involving the spread between a futures contract in London and another in the United States. “After London hours, there’s a big rally and you’re long the futures in London, and you’re short the futures in the US.”
Pulling variation margin out of the London market and moving it over to satisfy the negative variation in the US isn’t feasible with the current system, according to Wilson.
“You’re not even close,” he says. “What will happen is, the next day, that futures contract will rally.”
“Assuming then, the next day we open up and the market’s unchanged, then the London futures contract will rally and the variation margin will show up in your account,” he says.
“At that point, you can wire it out maybe that day, maybe the next day. Maybe now you’re running into the weekend.”
It just doesn’t work well with traditional finance technology, he says. “The whole system is just very clunky.” Everything is slow to move around and requires “a lot of extra capital” to deal with all the delays, according to Wilson.
“Being comfortable moving out the risk curve is super important,” Wilson says. “If you can move out the risk curve and you have access to super low-latency tools and connectivity, then you’re in a really strong spot. That’s where we try to be.”
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