Am I too mean to the idea of closed trusted blockchains run by consortia of banks? Really this is a perfectly heartwarming story:
The prospect of blockchain technology remaking financial services just moved a step closer to reality after banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. completed a successful six-month test in the $2.8 trillion equity swaps market.
The program, managed by blockchain startup Axoni, kept track of the swaps contracts after they were executed, recording things like amendments or termination of the deals, stock splits and dividends, and achieved a “100 percent success rate,” Axoni said in a statement Monday.
This is where I would normally object that there is nothing magically blockchain-y about keeping a centralized database of swaps contracts. Like, you could just hire Axoni — or Depository Trust Company for that matter — to keep a list of who has what swaps, and when you agree on an amendment or whatever you could send it to Axoni to update. And Axoni could keep that list on its computers, and it could also have a web page where the bank participants could log in and see the list. The actual innovative benefits of blockchain — a ledger without a trusted central party, permissionless access for anyone — aren’t priorities here, and so there’s no need for the traditional annoyances of blockchain — slow and energy-hungry multiparty verification of transactions, the inefficient redundancy of everyone keeping the list.
But, you know, “100 percent success rate”! And:
A blockchain system for equity swaps works to speed transaction times because the banks and asset managers all become members of a network that shares a so-called distributed ledger. Each member has an up-to-date copy of the ledger, so when payments need to go from one participant to another they can be processed almost in real time.
“Fewer valuation disputes, less reconciliation and real-time access to data would benefit all of the industry,” Adam Herrmann, global head of prime finance at Citigroup, said in the statement.
You can’t argue with that last part. Sure, Axoni could just have a good fast database and a good fast web page and a good fast communications protocol with its members, and when they sent in amendments it could just make them accurately, and they could trust Axoni’s centralized database so thoroughly that they could just use it as their own with no errors and no need for time-consuming manual reconciliation. But empirically, sociologically, technologically, that often seems not to happen. Some service provider provides a transaction database, and all of its customers keep their own local ledgers and are constantly finding discrepancies and haggling over them. But distributing the ledger — even distributing it narrowly among participant members, and keeping a centralized manager — does seem to have improved matters. If the actually existing blockchains are better than the actually existing centralized databases, then it’s a little silly of me to complain that you could do the same thing with a really good trusted database.
Still I object to “remaking financial services.” Five years ago, if I had come to you and said “I have discovered a new way to administer the swaps settlement process to reduce reconciliation errors from 2 percent to 0.01 percent” (or whatever the numbers are), you would have fallen asleep before the end of that sentence. The most impressive trick that blockchain-in-banking advocates have performed is not making marginal improvements to the efficiency of back-office reconciliation processes. It is getting the world to pay attention to those back-office technology upgrades, and to think that they might be revolutionary.
This post originally appeared in Bloomberg
Frontpage January 23, 2018