Ecosystem and new entrants: shifts in financial services
Do you remember Napster? Founded in 1999, the peer-to-peer file sharing service created a stir in the world. It allowed users to share audio files with each other, thereby undermining copyright. Nobody really talks about Napster anymore. But the idea of playing music from the internet has supplanted classic records sales. What Napster represented for the music industry is comparable to how Bitcoin will come to be seen for the economy at large, and especially the Financial Services Industry: the first flicker of a big idea. Blockchain and distributed ledger technologies are leading to two fundamental shifts: the way business is conducted, and how value is recorded, stored and transferred.
DLT, MORE THAN A TECHNOLOGY: A NEW WAY OF THINKING AND WORKING
Ecosystems and Consortia are the new reality. By its very nature, and in order to reap the benefits of this technology, Blockchain will force all players to rethink their role in the valuechain and wheretheyintend to position themselves in the new environment. Some technologies – spreadsheets to take one example – are valuable in the hands of a single user. Others require buy-in from many users, both partners and competitors, with their value increasing as more parties sign on. Although a distributed ledger can have an immediate positive impact even between two businesses, it derives more utility from network effects:
The greater the number of users, the more valuable the technology is to all of them. Consortia allow companies to take advantage of blockchain network effects immediately1,
by providing a vehicle to create a governance structure around this collaboration, often among players that compete against one another. Consequently, to use blockchain effectively and for its promise to become true, most enterprises need to be, and increasingly are, part of a consortium. At the same time, promising research shows2, banks that decide to shift their strategic mindset to an ecosystem approach and “successfully orchestrate a basic ecosystem strategy, by building partnerships and monetising data, could raise their ROE to about 9 to 10 percent”.
THE TOKENISATION REVOLUTION
The second major shift in Financial Services, and the Economy, is represented by digital assets and Tokenisation. It has the potential to reshape global financial markets and will fundamentally change the way we register, store and transfer value and assets. Ultimately, we are observing the birth of an internet of value, which will follow the current internet of information, making the transfer of an asset as simple and frictionless as sending an email. All types of assets can and will be represented by tokens, and we are already observing the emergence of smart securities. Digital or smart securities transform the capital formation process by automating costly compliance requirements through a transparent and immutable ledger. Additional benefits include 24/7 global markets, cost reductions, increased liquidity and rapid almost real-time settlement, allowing for improved risk management.
WHAT ARE THE BARRIERS TO ADOPTION, AND WHICH PLAYERS ARE EMERGING AS LEADERS IN THE DEVELOPMENT OF SOLUTIONS? ...AND WHAT’S NEXT?
In order to fully unfold its potential, the emerging tokenised economy needs a trusted, comprehensive and regulatory-compliant ecosystem; an integrated ecosystem around digital assets, developed by strong and experienced partners, to enable institutional investors to tap into the new asset classes and accommodate all client needs. Swisscom, the leading Swiss Information and Communication Technology (ICT) company, identified early on the potential of distributed ledger technology as well as the two shifts towards ecosystems and digital assets. For this reason, Swisscom is working on a comprehensive solution for the issuance, registration, storage and transfer of digital assets via the blockchain, together with partners.
As was recently announced3, Deutsche Börse Group, one of the world’s largest market infrastructure providers, is joining the efforts and, together with Sygnum (a Swiss and Singapore-based financial technology company), a new strategic partnership was established. The aim of this cooperation is to jointly build out and grow a trusted and regulatory-compliant financial market infrastructure for digital assets. The core elements of the solution will include issuance, custody, access to liquidity and banking services – all leveraging Distributed-Ledger-Technology (DLT).
Two main components of the infrastructure are already well advanced: the issuance platform, Daura AG (with a current focus on Swiss SMEs), and Custodigit AG, the digital assets custody platform, which also provides access to exchanges and markets. Daura AG, a joint venture by Swisscom and MME, a leading law firm, has developed a platform that uses Distributed Ledger Technologies to issue digital assets and to securely transfer and register Swiss SME shares, enabling non-listed companies to access the capital markets. Custodigit AG was founded in 2018 as a joint venture by Swisscom and Sygnum. Custodigit AG provides a digital asset custody solution for regulated financial services institutions. The integrated platform allows bank customers to manage the entire life cycle of their digital assets. The above developments are a clear sign that the ecosystem reality is already here, and it is expected to accelerate substantially in the coming years.
|PHILIPP DE ANGELIS is part of Swisscom’s Digital Business Unit, where he develops new ventures with a current focus on Digital Assets, Blockchain and Trust Services. He holds an MBA from IMD Business School.|
(1) Deloitte, Emergence of blockchain consortia, 2017.
(2) McKinsey, 2018.
(3) Deutsche Börse Group, 2019 March 11
Ethereum standards: a work in progress
Ethereum has the largest blockchain developers’ community. Standards for interoperability for tokens are discussed and decided within this community1. Here is an overview of the main functional standards.
ERC-20: ERC-202 is considered as the minimum set of functions for a token. It basically enables to check the total number of tokens or to check an account balance, to make a transfer, to authorise and to make a direct debit.
ERC-777: ERC-7773 is designed to be compatible with ERC-20. It introduces the concept of ‘Operator’, a proxy who is authorised to send tokens from an account. A smart contract is an Operator.
ERC-1400: this standard4 whose purpose is to handle securities is still being discussed. It is compatible with ERC20 and it should be compatible with ERC-777. It has four new subsets of functions:
- The core securities subset makes it possible to issue and to redeem securities, but also to definitively stop issuing more securities.
- The document management subset allows to set and retrieve off-chain documentation.
- The controller operation subset introduces a higher authority that has the right to force a transfer or a redemption of tokens.
- Finally, each token belongs to a partition to manage restrictions on transferability, for instance a dependency on a lock-up period or on meeting KYC requirements.
Thus, the ERC-1400 standard is not yet tackling any corporate events.
These standards constitute a very basic framework to transfer token and to issue them only. It requires very substantial improvements to properly handle secondary market operations.
(3) eips.ethereum.org/EIPS/eip777 and github.com/ethereum/EIPs/blob/master/EIPS/eip-777.md
(4) github.com/ethereum/EIPs/issues/1411 and blog.polymath.network/erc-1400-evolution-of-a-security-token-standard-1e25d12b9261