“Just as there is a Magnificent Seven of stocks in web 2.0 today, I believe there will be a comparable set of companies representing blockchain technology in web 3.0.” — Mike Cagney, co-founder and executive chairman, Figure Technology Solutions.
In 2015, New York technology startup Digital Asset Holdings hired a former JPMorgan executive, Blythe Masters, as its new chief executive officer. Masters was well known in traditional finance circles. Back in the 1990s, she’d played a leading role in the development of credit defaults swaps – a transformative innovation in the industry. At Digital Asset Holdings she hoped to advance another innovation in the financial services industry: blockchain.
Despite never becoming particularly enamored with cryptocurrency, Masters saw huge potential in the technology underpinning it. “This is a technology that enables institutions to do what they do already today using databases, but a lot quicker, a lot cheaper, with far lower error rates, with less resulting risk, and as a result with lower capital requirements and less vulnerability to cyber attack,” she said. One of her first clients was the Australian Stock Exchange. The Sydney-based exchange hired Digital Asset Holdings to build a new platform to replace its creaking clearing and settlement systems. A blockchain solution was seen as an exciting leap forward. “Blockchain technology offers unprecedented opportunities to transform the way markets operate,” said the Exchange’s CEO.
The project was meant to be completed in 2020 but it ran into trouble. As early as 2018, scalability issues were identified and when the pandemic hit, the implementation timetable was pushed out. After multiple delays, consultants from Accenture were called in to look at the state of the project. They concluded that by November 2022, the work was only 63% done. Amid much embarrassment, the project was ultimately dropped, triggering a parliamentary hearing and a regulatory lawsuit, with the Exchange forced to absorb a US$175 million write-off.1
When it was announced, the deal was seen by many as a test case for the use of blockchain in financial services. In a letter to prospective investors, Mike Cagney, co-founder and executive chairman of Figure Technology Solutions, another company that deploys blockchain-based technology in finance, reminisces about the challenge he faced pitching to banks in 2018. “This is great!” they told him. “We love it! We’d like to be the 10th bank to do this…” Financial institutions around the world were watching developments in Australia with anticipation. The exchange project’s failure served as a cautionary tale, vindicating those firms that had been reluctant to be early adopters.
Since then, reception has been mixed. Blythe Masters’ former boss, Bill Winters, is now CEO at Standard Chartered and he’s bullish: “As we think about how blockchain and digital settlement morphs from the cryptocurrency world – which is the bulk of the activity today – into the traditional finance world, we continue to believe – in fact, we believe more strongly than we ever have – that this is an inexorable direction of travel.” That was in July; in September he elaborated: “I and colleagues reached a very clear view … that eventually everything that we do will be settled on blockchains. So it’ll start with securities. It will move to FX and payments and eventually we’ll get into real assets.”
His former boss, Jamie Dimon, long-time CEO at JPMorgan Chase & Co, is more circumspect: “We use blockchain for repo. We’re using it for data sharing. We’re going to use it for correspondent banking. It will probably be deployed eventually in anything we do where blockchain is an appropriate technology to use. We have been talking about blockchain for 12 to 15 years. We spent too much on it. It doesn’t matter as much as you all think.”
JPMorgan actually operates one of the most mature institutional blockchains in finance. Under the umbrella brand Kinexys, it runs a peer-to-peer network for data sharing between institutions and fintechs called Liink, a digital assets platform to facilitate tokenization, and a digital payments platform. Since launch, it has moved over $2 trillion of value.
But, to date, most of JPMorgan’s efforts have been focused on private permissioned blockchain infrastructure, limiting their growth. This stands in stark contrast to blockchain’s original promise of transparency – a means “to displace trust with truth” as Mike Cagney puts it, with every transaction, every balance, every movement of funds permanently recorded and publicly visible. The trouble is, such openness impedes institutional adoption and conflicts with privacy regulations, which is why banks have preferred to keep their blockchain activity within walled gardens.2
Now though, a range of finance-centric blockchain platforms are hitting the market:
Digital Asset Holdings came out of the Australia Stock Exchange affair with a working platform called Daml and a protocol called Canton which address the privacy challenge by restricting data access to a need-to-know basis.3
Earlier this month, Stripe unveiled plans for a payments-focused blockchain, Tempo, that offers opt-in privacy plus a host of other features necessary to underpin large volumes of payments.
As discussed on this week’s Net Interest Extra podcast, Circle is also developing a blockchain for payments, Arc: “an open Layer-1 blockchain purpose-built for stablecoin finance.”
Circle’s chief competitor in the stablecoin market, Tether, supported the launch this week of Plasma, another “high-performance layer 1 blockchain purpose-built for stablecoins.”
Figure’s IPO spotlights the utility of its house blockchain, Provenance – “a purpose-built blockchain for financial products”.
What factors will determine which of these platforms succeeds? And is there room for more than one winner in the race to build tomorrow’s financial infrastructure? Read on to find out.