State Street opens up to the debate on the internal blockchain

There is no shortage of breathtaking hype on the blockchain.

What is more difficult to find is a sober and nuanced discussion of the advantages and disadvantages of technology for a particular case of use. From this perspective, it can help to talk to different people from the same company who have studied the issue and have reached divergent conclusions.

It is no secret that State Street, the giant US custodian bank, is trying to simplify the complex securities lending business using blockchain. A decades-old industry, securities finance today is a continuous dance of manual reconciliation, involving a number of market participants and loan parameters, all of which became even more complicated by the 2008 financial crash. [19659002] In theory, distributed ledger technology (DLT), with its shared vision of truth, eliminates the need for multiple processes and many intermediate players.

But it would never have been a simple transition – and it's at least one thing that executives from different parts of the bank can agree on.

As for how the peer-to-peer loan could be implemented, people in technology architecture and product teams are optimistic about what they see as an inevitable change.

On the product development side, Nick Delikaris, responsible for global strategies for negotiation and algorithms, said that "the whole industry" is looking at a peer-to-peer version of securities lending and that on blockchain I'm definitely at stake.

He also recognized the extent of the challenge, saying to CoinDesk,

"It's not an on-off button, as if you could wake up tomorrow and do everything to equal peer".

Delikaris said he expects to see a mix of products and services. "Different counterparts will have different tastes, and starting with some of these technologies could actually make things more difficult," he said.

"I think that's what we're facing right now, but at the end of the day, we'll have a better settlement in the industry."

In the meantime, the front office pragmatists, who perhaps take more than one position legacy market, remain wary of this transformation.

Doug Brown, head of alternative financing solutions at State Street, said he sees the potential value in the use of blockchain to allow the lending of P2P securities, but warns that most of the market is not ready for this.

look at that market and people who borrow securities, there are very few institutions that have the technology or operational infrastructure to do it on their own today, "he said.

Brown added that" c & # 39. It is a real question about the fact it is worth spending their time building that infrastructure, the cost to do it, the staff to do it – or if the model they use today is quite efficient. "

Pros and Cons

Taking a step back," peer "loan" in this context means that a customer who wants to lend securities (typically a large mutual fund or pension plan) is faced directly to the borrower (normally a hedge fund) instead of having a broker-dealer in middle management the whole operation.

State Street has a panoramic view of the securities lending panorama; the bank has two components under its roof that most people do not have, explained Delikaris.

"We have an arm called enhanced custody, which is basically similar to a prime broker," that is, a specialist service provider for hedge funds, he said.

"We also have the largest lender of agents in the world," he added, referring to the State Street business of lending securities to institutions on behalf of his clients.

This means that testing a blockchain idea – which State Street started doing in 2016 with a proof of concept (PoC) for digital tokens for post collatera l – has evolved until to the point where the bank is mapping the entire securities financing ecosystem for potential transformation.

And this, in turn, led to very different points of view within the bank on the pros and cons.

From his point of view of the front, Brown admitted that a P2P model could make it a little cheaper to borrow securities, while traditional State Street loan customers might do a little bit. more on the transaction.

But he also pulled out a list of challenges, and so he told a family story about the real benefits that brokers and brokers bring into a market.

Primary brokers, for example, manage all aspects of liquidity and are responsible for finding substitutive guarantees when required. Furthermore, if you switch to P2P without intermediaries, counterparties should rely on the adequacy of mutual credit.

In addition, there would no longer be compensation for default on the borrower, which is practically expected across the industry, Brown said. In other words, if the borrower in a P2P transaction fails to return the borrowed assets, the lender has no luck, while in today's market an intermediary such as State Street will cover the loss.

"A P2P model, where everyone is in front of each other and negotiates contracts, where protection has disappeared and both parties now need credit teams, it would not be probably a broad solution for industry, "said Brown.

"That model could work for a small subset of institutions, but if you had only a small number of participating institutions I think it might be hard to convince people that there was enough liquidity to really move that market in a broad way" [19659002] Delikaris took into consideration the real concerns of his colleague, accepting "this can not be done simply in a laboratory" but involves talking with customers to find out "what keeps them up at night".

However, he defended a P2P model that he said could be offered to lenders with an appetite for more risks, to those who might not care about the indemnity – adding that things could be assessed differently due to this .

"My personal feeling is that if some things are transformed because of this technology, I think you will see other products and services that will come and they will take away to help where these problems arise," he said. 19659016] Evolution, not revolution

Meanwhile, other banks are proceeding with securities lending using blockchain, but like State Street, they expect a long transition period.

In March of this year, ING and Credit Suisse completed a securities lending transaction using a collateral loan blockchain application co-developed by HQLAx and R3 .

Herve Francois, leader blockchain initiative in ING, said that for now his bank "is leverage the existing infrastructure of tripartite agents and caretakers to go more quickly to production, as this is in itself a legal framework "[19659002] Francois acknowledged that market participants could be left with missing services if they moved into a P2P model, and in the case it might be necessary to outsource the current intermediaries.

"It could be a way for those actors to still have a role in the short to medium term," he said. "It is a step in the blockchain evolution that in the long run should be able to disintermediate them."

Guido Stroemer, CEO of HQLAx, which focuses on the tokenisation of baskets of securities to help bank treasurers to better manage and transfer liquidity, agreed the legacy market requires that many operational steps be carried out in a consolidated manner

future, Stroemer said that some goods lend themselves to DLT better than others, with securities first, then in cash and perhaps in gold.

"Successful use homes will thrive only in the real world when they have relatively low barriers to entry," said Stroemer, concluding:

"Anything that requires a market user to go through a change "Big Bang" has no chance to create broad market adoption. "

Image of State Street via Shutterstock


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