04 OctThe One Way to Get Money into Blockchain and change everything

Adding money to the Blockchain is the single ingredient needed to realise the potential of this new technology. How to make that happen is the subject of this week’s post.

In various previous posts, I have covered the shortcomings of Bitcoin and also pointed out how unhelpful it would be if there were multiple Blockchain solutions in each currency.

Some may disagree: Bank of America, for example, seems to have some grand plans (Click here). Those readers with some investment banking history will know of all the challenges and costs associated with having multiple Nostros. In the dark days of early correspondent banking, banks would have Nostros and Depots all over the place; the accounts bred like rabbits. Simply put, the more accounts you have, the harder cash & liquidity management is.

Fewer accounts equals more control. With all the changes in things Basel and regulation, such as LCR and NSFR, proposals for new structures that make liquidity management harder, deliberately or not, will not help the industry.

We know form history, that the banking world already has an established process for transferring securities from one system to another. This is precisely the model on which we can build for the future; our industry could bridge between the current payments systems and a Blockchain platform with a “crypto-currency” equivalent. If all it needs to make regular shares turn in to ADR’s or GDR’s (see prior posts) is a transfer agent, then I would suggest that exactly the same role will enable “money” to be moved into and out of the Blockchain world.

In the ADR world, a custodian bank plays the role of transfer agent. Banks have accounts in the domestic system, for example, UBS has one account in SIX Securities, the Swiss CSD, the Central Securities Depository, and another in the DTCC, the US CSD. For each ADR, there is an agent, who takes delivery in one system and arranges delivery in the other system. That process works, though it has imperfections and delays, on top of which it is not at all rare for the agents to have some organisational hiccups that delay execution. Each of the CSD’s works on a stand alone basis.

Following from the securities setup, at first glance, in a Blockchain world, it is possible that commercial banks could act as agents to transform balances in fiat currencies into balances on a Blockchain platform. My sense is that this is sub-optimal; in the securities world there is one transfer agent for Nestle, one for Gazprom etc., so I would expect one transfer agent for each currency.

So, let’s recap what the expectations would for the role of transfer agent in a Blockchain world:

  1. Monopoly / sole-provider
  2. Agent will have to run its operations in a very controlled manner, to avoid disasters such as those at Mt. Gox
  3. Need to support high volume, high speed processing

Lessons Learned: Given these requirements, my sense is that it is the central banks that need to play this role of transfer agent; acting as the bridge between the legacy infrastructure and a Blockchain equivalent.

The logical next question is alone or together? Certainly all the central banks using the Euro would have to cooperate. If the South African Reserve Bank were to deliver the means to transfer ZAR between legacy and Blockchain, that would let many good things happen. For the banks though, this would mean managing links to at least one Blockchain platform in each currency they want to operate in. This beings similar overhead to managing multiple Nostros and Depots.

What about multi-currency connectivity; connect all the currencies to one platform? This would open many additional opportunities; for example, emulating what CLS Bank does for FX settlement, or more importantly providing a viable path into a controlled settlement solution for those currencies not in CLS. One platform would also have to have a single set of rules, which would also avoid the complexity associated with having several platforms.

So, my proposition is that there is a role to be played by the Central Banks that will not emerge from the private sector; in fact, competition here is likely to be a bad thing. Heinz 57 Varieties is not the right answer in the settlement arena.

I am suggesting central bank involvement in crafting and overseeing the solution, not necessarily building it or operating it day-to-day.

We have the Blockchain, we have an precedent in bridging between systems and in fact we also have a precedent in how to create an international platform where currencies are represented and the central banks have an oversight role. CLS Bank, which is responsible for the lion’s share of the world’s FX settlement, was created by a 3 step process:

  1. The CPSS issued a report, nicknamed the Allsop report, after the Bank of England official who led the work
  2. The report led to the formation of a G20 working group, which set out the design for CLS Bank and led the bidding work
  3. CLS Bank is a bank owned private company supervised by representatives of the currencies it operates in

What is needed to exploit the potential of Blockchain is a line to money. Ideally all currencies.

We can get there without a voyage of discovery or invention; all we need is the central banks to lead the path to innovation with some learning from history.

Understanding Bitcoin and Blockchain

My own epiphany in matters Bitcoin and distributed ledger technology is the result of three independent sources: I am indebted to Emmanuel Mogenet at Google for his inspiring gift of a Bitcoin, to Richard Brown at R3 for so readily sharing views and educating the latecomer and finally to Silicon Valley legend and LinkedIn CEO, Reid Hoffman for his seminal article in the May 2015 edition of Wired UK: “Reid Hoffman: Why the Blockchain matters.”

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