Traditional Finance ‘Blockchain-ification’: Pie in the Sky or Inevitable Future?
The dream that “everything will be on a blockchain” was a familiar refrain in the heady days of 2018’s ICO boom. ERC-20 tokens popped up for every imaginable purpose, from pure ponzis like BitConnect to coffee and cannabis supply chain ecosystems that — pardon the pun — went up in smoke as soon as the bubble burst.
Five years later, the notion of a much wider range of assets existing on the blockchain is nowhere near as far fetched. After all, so many assets are already traded electronically without any actual transfer of physical goods.
In a recent interview on the 1000X podcast, Don Wilson, founder of trading firm DRW and co-founder of Digital Asset Holdings, spoke with Blockworks about the potential for future “blockchain fixation” of traditional financial assets.
He begins with an important caveat: “There are some assets that are physical assets, like nickel,” he says. “You can put nickels on a blockchain, but ultimately the nickel has to sit somewhere.”
“If someone steals the nickel, then you have a blockchain that represents the nickel and the nickel isn’t there — and that’s a problem, right?”
“So that kind of thing is something that still has this intimate link to the physical world that’s super critical.”
Many instruments are already virtual
On the other hand, many instruments in finance are already “virtual” in nature, such as stocks and Treasuries, he says, “and people don’t usually walk around with their T-bills.”
Wilson says “these assets probably lend themselves more to digitization,” or as podcast host Van Bourg describes it, “blockchain fixation.”
“Right now,” says Wilson, “we’re experimenting with intraday repo using blockchain technology.”
Wilson describes the growing capacity for asset digitization built on the Canton Network, a “digital assets holdings blockchain.” The network aims to use permissioned blockchains to bring different banking and finance companies’ applications together, providing greater ease of use and security across platforms.
“It makes it possible to move values in real-time and even 24/7. And that’s the kind of thing that will make clearinghouses more robust if they want to use that technology.”
Today’s system is clumsy
With today’s financial system, transferring money internationally can take hours and is only possible “when the wire window is open,” he says.
Wilson illustrates current limitations with the example involving the spread between a futures contract in London and another in the United States. “After hours in London, there’s a big rally and you have long futures in London and you have short futures in the US.”
Taking the variation margin out of the London market and moving it over to satisfy the negative variation in the US is not possible with the current system, according to Wilson.
“You’re not even close,” he says. “What will happen is, the next day, the futures contract will rally.”
“Assuming the next day we open up and the market is unchanged, then the futures contract in London will go up and the variation margin will appear in your account,” he says.
“At that point you can plug it out maybe that day, maybe the next day. Maybe now you go into the weekend.”
It just doesn’t work well with traditional financial technology, he says. “The whole system is just very clumsy.” Everything is moving slowly and requires “a lot of additional capital” to deal with all the delays, according to Wilson.
“Being comfortable with moving out the risk curve is super important,” says Wilson. “If you can move out the risk curve and you have access to super-low-latency tools and connectivity, then you’re in a very strong place. That’s where we’re trying to be.”
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