The benefits of distributed-ledger technology might come sooner than expected as financial services firms begin to explore deploying distributed ledgers internally rather than across the industry.
“It is like using Internet technology to deploy a corporate intranet,” said Bob Bonomo, CEO of Blockchain Initiative Group.
Distributed ledgers will reduce the friction between processes by providing a ‘golden’ version of data across the enterprise as well as identifying when and where that data changes, he added.
“I wouldn’t underestimate the value to any institution of having a golden record of a trade shared between finance, risk, operations, and the front office, and it also includes the valuations and settlement instructions, just for the institution,” said Jennifer Knott, CEO of post-trade risk and information at ICAP. “When you look at the complexity of the consolidation hierarchy and how the multiple finance systems, operation platforms differ in processes and definitions even for somethings as simple as a name — just to have an internal golden record is going to be incredibly empowering.”
However, it is what firms can layer on top of a distributed ledger, the smart contract, that she sees as the technology’s true benefit.
Smart contracts are automated workflows that are coded directly into the distributed ledger and validated automatically. If a firm decided to write a smart contract for a five-year swap contract, the smart contract would verify that something affecting the contract has not happened and nothing needs to be changed, Knott explained.
“One of the most important examples in financial services is the idea that you are taking a long- or short-form contract and digitizing it and making it the golden record between you and your counterparty by creating a smart contract that includes the trade life cycle management,” she added.
The reputation of smart contracts is smarting recently after hackers managed to liberate approximately $50 million from the smart-contract based Distributed Autonomous Organization project.
“Someone unilaterally extracted that,” said a blockchain expert, who declined to be identified.
“There is a big debate on what can be done, but the terms of the DAO agreement were that whatever is in the code is binding,” he added. “someone figured out how to run the code so that they were able to extract $50 million of native tokens.”
That would never happen with smart contracts on a private permissioned distributed ledger used by Wall Street, according to the expert.
“The code is the golden record of what we believe represents the law,” he said. “If there was a credit event that affected a smart-contact based credit default swap, it is the ISDA Credit Determination Committee that decides if there is a credit default that triggers all CDSs. That data needs to get injected into the smart contract from a group of people sitting around a table into the distributed ledger.”
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