Is distributed ledger technology (DLT) really going to be as revolutionary as many say?
Or is it all about the hype?
Baton SystemsCEO and Founder Arjun Jayaram thinks the technology is real, viable and coming to a company near you. In a conversation with Traders Magazine, Jayaram told of how his company has onboarded major financial firms such as Citi and CME as new clients and is currently one of only 4 fintech vendors working on adistributed ledger technology POC with the Bank of England. He shared his thoughts with editor John DAntona Jr. on the applications and viability of DLT, how ready it actually is for banks and financial institutions, and when and where we should expect to see it in the next several years.
The following is an edited version of the conversation:
Traders Magazine: With the many potential applications of distributed ledger technology (DLT), do you see a wide adoption of the technology by banks in the next few years?
Arjun Jayaram: It will be at least a few years before we see any wide adoption of distributed ledger technology or blockchain. However, the underlying concept of DLT should not be overlooked as a great starting point, including as a foundational idea for our solution.
A key factor will, of course, be the budgets at financial institutions. Are they going to be willing to continue committing resources to testing and proof of concepts? The big hurdle for banks is finding and investing in technology that can solve their challenges now, not in five years.
With that being said, there are a litany of tests and proof of concepts being conducted by banks around the world. In fact, the Bank of England is currently working with Baton and three other fintech vendors on a proof of concept project for real-time gross settlement using distributed ledger technology.
TM: What regions do you foresee having the most promise in DLT development over the coming years?
Jayaram: Were still seeing a lot of testing done across major banks and institutions in the US and the UK. With Brexit looming, many European firms are sprinkling their internal technologists across different regions within the EU, as opposed to targeting single fintech-heavy cities. As a result, we should see an uptick in DLT experimination in cities like Paris, Amsterdam, Frankfurt, and Dublin.
The Asia-Pacific region is actually taking the lead on several areas. Some of this is because banking and market infrastructure in countries like China, India and Singapore do not have the same legacy technology issues that the US and Europe have. So it is less risky to experiment and integrate new technology innovations. The region has cities like Hong Kong and Singapore that are quickly becoming global hotspots for fintech experimination and implementation. Since these are export/import hubs, trade finance has become an area where some of the innovations could be applied very quickly. This also has been an area where traditional documents have been emailed and faxed across members to facilitate trade finance.
It is important to distinguish DLT from crypto currencies. Regulators in China, on the other hand, have come down hard on the use of cryptocurrencies and the crypto exchanges. I would imagine it will be a few years before DLT makes its way into the mainstream there.
TM: What areas of the trading lifecycle do you believe will be most heavily impacted by DLT?
Jayaram: First and foremost, the settlement process. Distributed ledger technology would bring dramatic improvements to the efficiency, security and cost of these processes. The technology banks are currently using is several decades old and costing more to maintain and repair than just replace altogether.
A report released by the Bank for International Settlements stated that settlement efficiency for securities and derivatives could be enhanced by DLT, but more testing will need to be conducted in order to accurately evaluate its true viability for specific use cases and implementations.
TM: What are some of the key trends youre monitoring around DLT?
Jayaram: When it comes to anything pertaining to DLT or cryptocurrencies, regulation will always be one of the most pressing issues. As I said before, countries like China are taking an aggressive stance on regulating cryptocurrencies, which obviously puts a damper on demand for DLT. Regulation dictates how market structure evolves and over the next year or two, expect regulators – especially in the US and Europe – to focus more on risk factors involved with this kind of technology.
Second is transparency. When outlining the impact of technologies of the future and what will resonate most with the evolving banking landscape, transparency always surfaces as a benefit to greater management of market and counterparty risks. In the ten years since the financial crisis, regulators have taken profound steps to address transparency issues and the role that technology plays. The concept behind DLT is to provide greater transparency but, as stated earlier, it will take more testing to convince the powers that be that this is the cure to their current opacity issues.
We can also expect to see banks and hedge funds consolidating their trading desks and looking at how to address operational and capital inefficiencies.
TM: How is Baton utilizing DLT to disrupt the banking sector?
Jayaram: For decades, the movement of money has been complex and offered little visibility or security. The current technology banks are using is antiquated, inefficient and incurs significant costs – seen and unseen – across the global financial markets. We like to say that Batons solution is inspired by blockchain.
Weve essentially taken the benefits of blockchain technology and removed some of its characteristics that are still under scrutiny from the industry, like the need for critical mass.
We use distributed ledger technology to serve as a gateway, or translator between disparate ledgers. Weve actually reached the point where we can operate on existing rails between banking ledgers to accelerate the payments and post-trade settlement process from what normally is about 48 hours to just under two minutes, allowing real money to move in real-time.
Were in an exciting place right now. Just two years out from our launch, weve signed Citi and CME as clients, deployed our solution onto the Oracle Cloud Marketplace and its Innovation Platform for Open Banking in March, and have plenty more in the pipeline – like the BoE project – to keep the momentum rolling.
