Market Enabler? Exchanges See Blockchain as New Revenue Play

At a conference in Budapest this week, financial industry execs revealed shifting views on the best use case for distributed ledger tech.

AccessTimeIconMar 30, 2017 at 11:30 a.m. UTC
Updated Sep 11, 2021 at 1:12 p.m. UTC
CoinDesk - Unknown

While distributed ledgers were once considered a way for financial firms to upgrade back-office processes, some appear to be changing their tune on the tech.

At the World Exchange Congress in Budapest this week, representatives from global exchanges met to discuss market issues, with speakers including representatives from the Central Bank of Hungary, CME Europe and the variety of regional operations that power global trading.

Blockchain, while not high on the agenda, was a frequent topic of conversation and confusion among attendees, with some making eager pitches for the technology and others balking at its overwhelming hype.

Still, in side presentations and roundtables, there emerged the idea that distributed ledger tech is perhaps ill-suited for use cases that would spur cost savings, and that exchanges should consider it first as a way to explore new market opportunities.

Ted Pendleton, senior vice president at blockchain solution provider AlphaPoint, wasn't shy about promoting this view. He argued in his presentation that revenue-generating opportunities are the best way for organizations to not only test, but gain from the technology.

Pendleton told attendees:

"I'll be very blunt about this, it's perfectly acceptable to use blockchain in over-the-counter derivatives, but I think there are faster opportunities."

Pendleton went on to explain how an exchange could use blockchain to open a market that digitized the trading of a new asset, such as the chemical element lithium, a market he projected as an opportunity worth up to $30m.

"Very much like the physical world, you're able to gather together producers in a single chain and start generating revenue," he continued.

On stage, there was a similar agreement.

Cees Vermaas, CEO of CME Europe, didn't mention blockchain directly, but alluded to his firm's work with the technology in a keynote speech that addressed how the commodities giant is approaching digitization and included mention of its ongoing pilot with the UK's Royal Mint.

"This is one of the reasons why at CME Group we are working with the Royal Mint on digitizing gold. The right level of dialogue and technologies can minimizes risk and cost will maximizing workable innovation," Vermaas said.

Other representatives that discussed blockchain included David Janczewski, head of strategic marketing at the Royal Mint; Sergey Putyatinskiy, CIO at the National Settlement Depository; and Kraken COO David Ripley.

New directions

Elsewhere, a blockchain roundtable discussion hosted by US tech consulting firm EPAM saw heated discussion on the direction of the technology.

There, Balazs Fejes, an SVP at the firm, outlined five use cases he believes exchanges should consider, including settlement, over-the-counter trading and proxy voting. Yet, the idea these existing processes could be optimized by the tech was challenged by vocal and outspoken participants.

Sergei Poliakoff, CIO at Moscow Exchange, for example, argued that exchanges should be looking to blockchain as a way to "break their own business model", questioning its use as a "complicated distributed database" at all.

Instead, he argued exchanges would be best advised to pursue new markets such as crowdfunding, energy trading and property trading.

"We should look for transactions that have never had central counterparties, where the core finance built on the correspondent relation is untouched by any of this," he said.

In this light, Fejes made the case for loyalty points as an example of a market that could benefit from new exchange services powered by distributed ledger tech.

Risky markets

Still, there were signs that the idea that back-office processes would be disrupted by the tech isn't going away entirely.

Indeed, the potential impact of a unified blockchain that resembles the internet in its scope and ease of access was perhaps most visible in sessions that didn't address the tech at all.

For example, a panel on challenges in the African exchange market saw discussion on how regional exchanges suffer from poor liquidity, but have also been unable to unite their order books despite attempts over the years.

Elsewhere, challenges in opening access to less trafficked global exchanges was presented in a panel on 'market classifications'. There, index providers and emerging markets shed light on the complex process by which exchanges are graded and ranked for investors.

Pendleton, too, spoke to the discrepancy in technologies between developing and developed markets as an example of the path forward for blockchain in the back office.

"We all live in the western world, where the response is, 'Don't touch my billion dollar database'," he said. "Other markets are starting new."

Others argued that the upgrade to such systems was necessary to reduce the risk to the global financial system as a whole, one that faces new cyberthreats.

Despite his skepticism on database use cases, Poliakoff made perhaps the most impassioned pitch for blockchain's benefits in remarks that showcase how a long-term vision is still powering exploration of the tech.

"Cybersecurity will be the biggest driver. Cyberthreat is not a threat anymore, it's a War on Drugs or War on Terrorism," he said, adding:

"The only way to live with that is to distribute vital portions of our infrastructure. I think that's the biggest push for DLT."

Images via Pete Rizzo for CoinDesk


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