Understanding the impact of the blockchain on traditional finance

Video transcript

1. Many people get confused between crypto currency and the blockchain - what is the difference?

It's very important to understand that blockchain and crypto are not exactly the same thing; however, they are highly intertwined. And the way I like to explain blockchain is that it's a tripod, where you have three important components. A blockchain is a database that is maintained by a network. But that network, in order to maintain the database, needs to be financially incentivized. And the cryptocurrency, or the token or whatever we call it, is the unit of account that is going to incentivize the network to maintain the database. So three things: a database, a network, a unit of account. That unit of account is what we call cryptocurrency, is what we pay transaction fees in, is what we use to pay block rewards in. A block reward or a transaction fee is money that is paid to the network for the creation of new blocks. A blockchain is nothing else than a chain of blocks, in which every block is timestamped and ordered chronologically. And every block represents a state of the world where contracts have been executed between that block and the previous one. So blockchain technology is very powerful because the network that maintains the database maintains blocks and creates blocks has nothing to do with the parties that are involved in the transaction. If I do a transaction with you, the network that is going to execute that transaction and then input the update, output of that transaction, into the new block has nothing to do with you or me. And that creates trust. That creates executed and quarantined contract execution between parties. But in order to do that, the network, like everybody in the world, has to be incentivized financially. It has to be paid for, and the cryptocurrency is what pays the network to maintain the blockchain. And so why is automated, disintermediated contract execution so important? It's important because it's to guarantee the fact that once you and I agree on the definition of a contract, the execution of that contract is going to be done in a cost efficient, secure, transparent way. And that matters in every industry that heavily relies on contract execution. We can obviously think about finance, where everything is about contracts between parties. But we can think about that also in shipping. We can think about that in trade finance. We can think about that in real estate. We can think about that in art, collectibles. There are many industries where that industry is heavily reliant upon the execution of contract between parties, but where we want to make that more secure, cheaper, and where we don't necessarily need people involved in the transaction to be involved in the execution of that transaction, because that actually creates conflicts of interest. So blockchain removes that conflict of interest element between the execution of a contract and the parties involved in the contract.

2. Why will we tokenise traditional assets?

Going back to what I just said, blockchain is about contract execution, right? But contract execution on what? Most contracts that we execute have an underlying asset that is referred to in the contract, especially when we think, for example, of the financial industry, generally you'll have what's called an underlying asset. That is going to be an equity, a share of a company, it's going to be a debt security, it can be a government bond. It can be any type of traditional assets that we use that is going to be the underlying of that financial contract. But in order to leverage blockchain technology to execute financial contract, we need those underlying assets to have an on-chain representation, and that's what we call asset tokenization. So asset tokenization literally means giving a physical form of that asset a digital representation of that asset onto the blockchain, so then we can wrap around it a contract. And for me, not unlike back in the migration to electronic trading where we had to digitize assets, we're not trading paper securities anymore today. We all have a digital representation of shares, equities, bonds, debt, real estate, owning everything. So in the same way that we had to digitize assets in order to move to electronic trading and benefit from electronic trading, we will need to tokenize assets to benefit from blockchain-based contract execution. And that will apply to equities, rates, bonds, SME, securities, real estate, arts, collectibles, any kind of assets.

3. What does this mean for the way we do things now?

What it means for traditional financial institutions is that they have an opportunity today to disintermediate their own internal processes that have lower human value add, but still high friction points. And I'll give an example of that. Today, in the workflow of a traditional capital markets service, you have the front office that is going to be structuring a contract, agreeing with the client. Then you'll have the middle office, then the back office, and then settlement agencies getting involved for a T+2 settlement of the financial contract. The front office, the structuring of the contract, the client-facing operations is still extremely important and will remain. Where blockchain provides an opportunity is for banks to disintermediate their own internal workflow and value chain of the middle to back to settlement agencies. This is actually costing a lot of money to banks to maintain this setup. This is actually where human errors come into play. There's a lot of friction here and this is what causes delays. So for me, the opportunity for the financial industry with blockchain is a lot about operational efficiencies and about while maintaining the whole structuring part of the financial contract, disintermediating the execution of those contracts. So it is an opportunity to cut costs. It is an opportunity to streamline the way contract execution runs in the financial industry in a more secure and transparent manner.

4. 2022 had its challenges for this industry. What's next?

What we have seen is a bit of a cleaning up of the space. Very often when that happens, it has nothing to do with the blockchain as an underlying technology, and it has all to do with bad actors acting very often in bad faith or being a little bit too greedy with leveraging the asset class and trying to accelerate things faster. The problem with crypto, it's a liquid, unregulated, 24/7 global market with a lot of emotions still involved in that, because a big part of crypto is still very much retail-driven. So some people can leverage that. And I think what we've seen in 2022 is a bit of a cleaning up of the industry where bad actors have been exposed. Because in a bull market, where prices go up, everybody's smart, everybody can kind of free ride a little bit. When the market crashes, where we're seeing bear markets, it exposes the bad actors. And I think that's exactly what happened last year. So I think it's good for the industry. We're seeing the good players being more involved in self-regulatory actions as well, and just becoming cleaner than the regulatory even ask them to, just to self-reregulate and prove the good faith in the industry. And also, all of the companies that are building and that are providing, especially on the institutional side, actors like us providing market infrastructure, and that is custodians, market data, tokenization companies, people providing accounting services, audit services, all of these companies are actually trying to figure out, "How can we build more credibility into the space?" And that, I think, is positive for the industry. 2023 is a year where we're seeing high institutionalization. There is not a single financial institution globally that doesn't have a digital assets team today, so that proves the interest into the technology. And then, all of the actors that are addressing that segment of the industry is here providing services and building. And 2023, for me, is a year of build and consolidation for the good actors that are kind of still standing today.

For institutional, professional investors and financial intermediaries only and not for retail or public use.