On a sunny spring morning in the city of London, Broadridge gathered financial services industry practitioners together to discuss the effects of disruptive technology within capital markets, with a panel debating strategies for technological change, regulatory barriers, and the difficulties of changing culture within the industry.
Vijay Mayadas, senior vice president for corporate strategy at Broadridge and moderator of the morning’s panel, began by asking speakers just how disruptive new technologies in the market could be.
One panellist, Phillippe Ruault (pictured, far right), chief innovation and digital officer at BNP Paribas Securities Services, immediately pointed to blockchain as a potential game-changer, noting that the technology has quickly matured.
Another speaker, Justin Chapman (pictured, right), senior vice president and global head of market advocacy and innovation research at Northern Trust, warned attendees to remain mindful of disruption amid the many challenges their firms may be facing.
However, Gavin Wells (pictured, far left), head of Europe at Digital Asset, suggested that, rather than being disruptive, technology should be seen as “transformative” and “enabling”.
Technology is about “transforming something to be more efficient,” Wells said.
“If a change happens in your market and you sit still and your competitors don’t, then perhaps your position will change,” he said. “But that’s a choice. It’s not the technology.”
Stephen Phillips (pictured, left), partner and head of the IT practice for Europe, the Middle East and Africa at Bain & Company, suggested that it’s important to retain some perspective on the matter of disruption. Phillips noted that there is a subset of activities within the back and middle office where new technologies have the potential to save firms significant amounts of money.
In areas such as reconciliation and compliance management, “there are massive amounts of what one might consider waste,” he said.
The complication arises, however, in considering how to develop the technology asset class-by-asset class, use case-by-use case, and jurisdiction-by-jurisdiction. While the benefits are clear, actually implementing the technology can prove to be a lot more complex.
Disrupt and conquer
Predictably, blockchain provoked lively discussion among the panellists. Mayadas suggested that this technology has opened up new ways of conceptualising the whole industry.
He noted: “Blockchain is viewed by some as a profoundly disruptive technology, a transformative technology—others view it as an over-hyped technology or a solution looking for a problem.”
Mayadas asked panellists what they believe will drive adoption of blockchain, and how the markets are likely to evolve in a blockchain environment.
Chapman said that blockchain is indeed over-hyped, transformative and disruptive. He added, however, that there are opportunities to be had in how it is deployed.
There are significant costs involved in implementing blockchain projects, Chapman said, however they don’t necessarily lie in the technology itself, but in the legal and regulatory requirements, which can triple the budget in some cases.
Chapman noted that blockchain does have the potential to change business structures and reduce inefficiency but, he warned attendees that this change may not be all good, saying that, as financial services providers, “we all charge for that inefficiency”.
Phillips also pointed to the cost and economics of blockchain adoption, suggesting that ‘wasted’ inefficiency dollars represent profits for financial services. For example, the industry has been wrestling with digitising syndicated risk management for years, he said, but this has been difficult because the current status quo is profitable for insurance managers and brokers.
The same thing is likely to happen with blockchain, and the industry has to “find the incentive to break through this”.
Ready for regulation?
With regards to the role of the regulation in blockchain, Wells suggested that the regulators are being fairly proactive with regards to the technology, although there are jurisdictional differences.
“When we’re dealing with such sensitive issues as financial markets and their infrastructure and their regulators, it’s going to be a prudent approach,” he said.
“If a new technology is to come in, I would think it’s going to come in initially through the trusted operators who the regulators know.”
The large, trusted players in the market are the ones regulators can look to for answers and clarifications, Wells said. Only through these firms adopting blockchain first will the regulators have “comfort of control”.
Chapman responded to this, however, with the claim that: “If you regulate technology you kill technology.”
If a firm’s business model isn’t changing, he argued, the regulator should not have an issue. Regulators should only be involved if a regulated entity within the firm is being modified or removed. Regulators often get wrongly mixed up in technology conversations, Chapman said.
While agreeing with Chapman’s point, Wells countered that, whenever technology changes, regulators want to see the outcome of any testing. Even with existing technologies, “they don’t regulate the technology, but they do intercede” in order to make sure systems perform as they should, he said.
Ruault added that both firms and regulators may be looking at blockchain slightly differently to other technologies because it has the potential to “change a key aspect of investor protection”.
While the intent may not be to regulate the technology, Ruault said, they perhaps need to have an idea of the potential it brings.
Further to this, Chapman also suggested that, in order to get the best from blockchain developments, firms have to consider how the technology is going to work as a whole. He said: “You also need good participants to work with you, you can’t do these things alone.”
Slow and steady
Adoption of blockchain is likely to be centralised, controlled and consensus-driven, according to Phillips, and take-up will be based on “the confidence that we all have in the underlying technology”.
On top of questions that remain around the regulator, there are still issues around the scalability and security of blockchain, Phillips said. He went on to question whether the industry is realistically likely to align itself around a technology that requires data standards.
Wells added to this, suggesting that adoption of blockchain will be an evolution, starting with areas where there is inefficiency, where systems are coming to a natural end of life, or where institutions need to cut costs.
However, he noted that adoption will vary throughout the market.
Just because there are problems in these areas “doesn’t mean that this technology is the answer”, he clarified, adding: “It doesn’t solve all ills.”
