New Money Review podcast

New Money Review podcast

A massive boost to the financial system

March 23, 2020


New technology offers a massive boost to the resiliency, accessibility and transparency of the financial system, says Alex Batlin, CEO of Trustology, our guest in the latest New Money Review podcast.

Centralisation and its drawbacks

“If you have centralisation, you have risk. There’s always a trade-off between the efficiencies of centralisation and the risk of a single point of failure.”

“If you submit a transaction to a central database, it’s very difficult for either party to prove who made the transaction. Was it the service provider who is responsible for entering the record of the transaction? Or was it the end-user? The end-user can claim there was an error and blame the database operator. This is why I got excited by blockchain. In blockchain, users sign transactions cryptographically with private keys only they possess. This gives the properties of non-repudiation and integrity: you can prove the transaction has been signed by that individual.”

“So far, settlement has always been done by a central authority. Therefore, you need to trust that authority. Two parties who don’t know each other are not prepared to hand over money to each other, but they are prepared to hand it to a third party like BNY Mellon.”

Blockchain and smart contracts replace trusted third parties

“Because blockchain is decentralised, it’s extremely resilient.”

“Blockchain enables you to create a trusted third party virtually, by means of a smart contract. We’ve never had this before.”

“Under blockchain, there is no trusted third party in the traditional sense—an entity who does things for you. The trusted third party becomes the smart contract. So now you need to trust two things: that the network of transaction verifiers which powers the smart contracts is performing as wanted; that the code of the smart contract is correct.”

Blockchain gives massive cost savings

“To issue a new utility token to power a network you’re launching, you can write a smart contract on ethereum using the ERC-20 standard. You can buy that off-the-shelf for £25 and deploy it on the blockchain for less than a pound. You now have a global token that can be used anywhere. In the old financial system, to issue a security you have to talk to DTCC, the custodians, investment banks and broker-dealers. This would all cost millions of dollars. It’s a completely different cost profile.”

“You can put a lot of business logic in a token to guarantee that only the right people are allowed to use it. And baking the logic into the token is a lot more efficient than relying on third parties to enforce rules.”

The new settlement paradigm

“Once you’ve issued the token, if you want to swap it for something else, say ether, you can also do this by means of a smart contract, rather than using a settlement agent.”

“Currently, most securities settlements are batch-based. It can take as long as five days to settle a transaction, for example. In ethereum, most settlements take place within 20-30 seconds. Some people like the old system because it allows them free credit in the period before they have to settle.”

Positive outcomes

“We are massively improving the resiliency and auditability of the financial system.”

“The technology is global and instantly accessible to anyone. That will lead to global liquidity pools, where the real power is going to be.”