At

Clearstream,

we are

exploring

ways of

leveraging

blockchain

to support

our mandate

to make

markets

more

efficient.

leader

Blockchain seems to be the buzzword of 2015. The technologyunderlying bitcoins has suddenly evolved from a niche area ofexpertise to a key skill. As a result, representatives of the financialindustry are grappling to understand the complex disruptive impactblockchain could potentially have on well-established financialstructures.

While possible scenarios range from simple process optimisation todisintermediation of key players in financial transactions, it isactually very hard to make accurate predictions on what willhappen. Since the technology was only used in certain niche sectorsin the past, its true scalability to the financial industry and viableadoption paths are little understood. A multitude of newpartnerships between the financial industry and technology wereformed with the aim of bridging this knowledge gap, for examplethe R3 consortium with major banks. While it would be unwise toignore the innovative potential of blockchain, it would be equallyshort-sighted to completely discard the current set-up with its well-established safety mechanisms and the legal certainty they bring.

At Clearstream, we are currently investigating blockchainopportunities with our parent company Deutsche Börse Group. Forexample, we are engaging with start-ups and entering intocollaborations with clients to see how we can leverage thetechnology to make post-trading more streamlined and efficient.

Blockchain is essentially a distributed database of transactionsthat removes the need for centralised ledgers, trusted parties, goldencopies and manual interventions. For bitcoins, this distributeddatabase is updated every ten minutes. During these updates,pending transactions are included in the blockchain through adistributed consensus mechanism such as the bitcoin mining process.

In a public database, all participants have a complete and agreed

record of pasttransactions.A l te rnat ive ly,access to blockchaindatabases can also beconfigured to participants’needs in a permissioned network.This customised access means that in post-trading, banks could begiven access to a blockchain while the underlying client data couldonly be seen by the relevant banks and by all regulators.

For the post-trade industry, it could be attractive to replace thecurrent process of trade reconciliations by such a consensualapproach to distributing information. In addition, the settlementcycle could be reduced from two days to a matter of seconds orminutes. Blockchain could also be used for handling new assettypes or for currently untapped markets that lack supportinginfrastructure. While post-trade service providers should certainlyembrace any technology which improves their service to themarket, we at Clearstream believe that market infrastructurescurrently in place guarantee a level of safety and legal certaintywhich a network of computers is unlikely to match.

While we can use new technology to make securities servicesmore efficient, it is important to recognise that the industry hasgone to a considerable amount of effort to provide a safe, stableinfrastructure for people’s money. We must avoid a trade-offbetween efficiency and safety; removing intermediaries will alsoremove the integrity they bring to the market. Against thisbackground, the removal of major intermediaries in existing,well-developed financial markets by blockchain seems ratherunlikely at this stage. It is important to refocus the discussion onthe barriers the new technology could overcome while keeping inmind the major contributions that financial intermediaries couldbring to models based on blockchain in terms of trust, legalcertainty and safety.

At Clearstream, we are exploring ways of leveraging blockchainto support our mandate to make markets more efficient. Thetechnology could be integrated into the existing post-tradelandscape. In any case, widespread changes to the financialindustry based on blockchain will not happen overnight. Thissaid, the technology has the clear potential to contribute tomarket efficiency and is therefore likely to continue to attractinterest. �

A lthough blockchain technologyhas been around for years, itseems that the financial industry

has only now started to realise itspotential. While blockchains certainlyoffer exciting possibilities for theconsolidation of transaction flows, theCEO of Clearstream Holding, Marc Robert-Nicoud, advocates a balanced approach.

by Marc Robert-Nicoud, CEO, Clearstream Holding

Is Blockchain TechnologyReally the Solution to AllOur Problems?

TMI239 Leader.qxp_Layout 1 04/12/2015 17:49 Page 1

Reprinted from Treasury Management International (TMI) | www.Treasury-Management.com