Inside the Secret Meeting Where Wall Street Tested Digital Cash
Inside the Secret Meeting Where Wall Street Tested
Digital Cash
By Matthew Leising
May 2, 2016 — 6:00 AM PDT
On a recent Monday in April, more than 100 executives
from some of the world’s largest financial institutions gathered for a private
meeting at the Times Square office of Nasdaq Inc. They weren’t there to just
talk about blockchain, the new technology some predict will transform finance,
but to build and experiment with the software.
By the end of the day, they had seen something
revolutionary: U.S. dollars transformed into pure digital assets, able to be
used to execute and settle a trade instantly. That’s the promise of a
blockchain, where the cumbersome and error-prone system that takes days to move
money across town or around the world is replaced with almost instant
certainty. The event was created by Chain, one of many startups trying to
rewire the financial industry, with representatives from Nasdaq, Citigroup
Inc., Visa Inc., Fidelity, Fiserv Inc., Pfizer Inc. and others in the room.
The event -- announced in a statement this Monday --
marked a key moment in the evolution of blockchain, notable both for what was
achieved, as well as how many firms were involved. The technology’s potential
has captivated Wall Street executives because it offers a way to free up
billions of dollars by speeding transactions that currently can take days,
tying up capital. But a huge piece of that puzzle is transforming cash into a
digital form. And while some firms have conducted experiments, the Chain event
showed a large number of them are now looking jointly at a potential solution.
“We created a digital dollar” to show the group at Nasdaq
an instant debit and credit on a blockchain, said Marc West, chief technology
officer at Fiserv, a transaction and payments company with more than 13,000
clients across the financial industry. “This is the first time the money has
moved.”
Quietly Building
Chain is already known in some Wall Street circles for
its project to help Nasdaq shift trading of non-public company shares onto a
blockchain. But for the most part, it has kept relatively quiet compared with
other fintech ventures.
The San Francisco-based company also used the April 11
meeting to introduce its customers and investors to Chain Open Standard, an
open-source blockchain platform that the venture has been designing for more
than a year, said Adam Ludwin, the company’s chief executive officer. What
Chain has done is engineer the complicated elements needed for a blockchain to
work, so that its customers can build custom solutions on top of that to solve
business problems, he said.
“We’ve been quietly building with a whole bunch of folks
for a few years,” he said. “Blockchains are networks, so we think collaboration
is important, but what’s even more important than collaboration at the
beginning is getting the model right.” The event was kept secret so executives
could freely share nascent ideas and take risks. “The more press, the less
quality of the dialogue and problem-solving,” he said.
The most common blockchain is the one supporting the
digital currency bitcoin, which has been active since 2009. Financial firms
have been reluctant to embrace bitcoin, however, as its anonymous users could
entangle banks in violations of anti-money-laundering and know-your-customer
regulations. Digital U.S. dollars, or any other fiat currency, on the other
hand, doesn’t pose those risks.
‘Mainframe Era’
Nasdaq and Citigroup partnered to explore how they can
work together, said Brad Peterson, the exchange-owner’s chief information
officer. He said blockchain also could be used for reference data -- how
specific stocks or bonds are identified across all markets, for example.
Wall Street was one of the earliest beneficiaries of
computers replacing office systems. Now 30 years later, those legacy systems
can be a hindrance to further technological evolution, he said.
“That’s the great opportunity -- how to unlock that
ability to work your way out from under the mainframe era,” he said.
While cash in a bank account moves electronically all the
time today, there’s a distinction between that system and what it means to say
money is digital. Electronic payments are really just messages that cash needs
to move from one account to another, and this reconciliation is what adds time
to the payments process. For customers, moving money between accounts can take
days as banks wait for confirmations. Digital dollars, however, are pre-loaded
into a system like a blockchain. From there, they can be swapped immediately
for an asset.
“Instead of a record or message being moved, it’s the
actual asset,” Ludwin said. “The payment and the settlement become the same
thing.”
Rare Collaboration
Ian Lee, head of Citigroup’s global lab network and
acceleration fund, said one of the first areas of research Citigroup undertook
when it began studying blockchain was how digital cash could be used. He was
impressed with the variety of clients Chain brought together, as collaboration
on Wall Street is rare. A lot of companies are facing the same problems with
how to make blockchain a reality for their business, he said.
“While blockchain technology has a lot of potential, it
will need to integrate with and co-exist with the financial system that exists
today,” he said.
Ludwin said blockchain has been validated on Wall Street,
and now it’s time to focus on creating solutions.
“Putting it all together is no small amount of work, nor
is re-engineering business processes within large organizations,” he said.
“This isn’t ‘financial engineering.’ This is software engineering that is going
to reshape financial services.”
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