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Blythe Masters, the former JPMorgan banker now leading a blockchain start-up, has cautioned that the US is likely to lag behind other countries in using the technology underpinning the cryptocurrency bitcoin to modernise their securities markets.
Ms Masters has become the most high-profile former banker to join a rapidly growing industry of technology companies, venture capitalists, banks and exchanges all investing in ways to harness the latest computing trends from Silicon Valley to Wall Street.
Blockchain, the technology on which the controversial bitcoin digital currency sits, has been touted as a way to save banks billions in costly back office procedures such as clearing and settlements and loan processing.
Such a move could overhaul some of the financial industry’s most entrenched and inefficient practices. But Ms Masters damped hopes that the US could lead a potential revolution.
“There are jurisdictions outside the US where it will happen quicker and that’s because there are markets where there is a vertical integration all the way from the exchange through to the custodian’s custodian if you will,” she said on Thursday at a conference organised by CoinDesk, an industry news site.
“There the decision-making process is contained within a smaller number of bodies and there are a couple of jurisdictions with very supportive governments that are driving that. So I think you will see it outside the US probably before you see it meaningfully in the US,” she added.
Clearing of securities in US markets is largely processed via the Depository Trust and Clearing Corporation. Other clearing houses around the world, including in the UK and Germany, clear both securities and derivatives and have closer links with their settlement houses, which speed up the time it takes to post collateral from customer accounts.
While stock markets have been reshaped by high-frequency trading that takes place in milliseconds, the transfer of many financial assets still takes days if not weeks as a result of legacy back office systems. Securities deals in the US typically take up to three days to settle, a process known in the markets as “T+3”, while waits of 20 days or more are typical in the settlement of loans.
“T+3 is not particularly satisfactory, but it isn’t profoundly broken,” Ms Masters said. “If you look at the loan market that is operating at a T+20 — plus plus plus — basis and the consequences of that are impacting the economics of the business materially and adversely, that’s going to have to change whether it’s distributed ledger technology that fixes it or not,” she added.
Ms Masters’ Digital Asset Holdings is just one in a crowded field of companies vying to develop products to replace existing securities trading systems.
Duncan Niederauer, a former chief executive of the New York Stock Exchange, has invested in Symbiont, which is developing a platform that uses blockchain, while Nasdaq has partnered with US start-up Chain for a private share-trading platform earlier this year.
On Wednesday, Chain announced $30m in new funding from investors including Visa, Nasdaq and Citi Ventures.
Banks too are exploring the technology’s potential through their own innovation arms and incubators, but there is still scepticism about blockchain start-ups promising to transform their businesses with shared database technology.
“Am I going to go rip out all of that legacy infrastructure and start sharing it with other banks anytime soon? I think that’s a five to 10-year dream,” said Simon Taylor, blockchain and distributed ledger lead for Barclays, in a later panel discussion at the same conference.
