Traditional Finance ‘Blockchain-ification’: Pie in the Sky or Inevitable Future?

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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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