Edition: February/April 2018


Basics unblocked

The sooner that trustees come to terms with Blockchain, a disruptive technology if ever there was, the better for their funds. At its epicentre in SA is Monica Singer* who, in this Q&A, gently guides those not too embarrassed to admit that they’re more or less technologically challenged.

TT Having developed Strate (Share trading transactions totally electronic) for SA capital markets, would you describe what you’re now doing with Blockchain as something different or something complementary i.e. an ongoing evolution?

Singer: It is definitely part of a Strate evolution. More broadly, for the capacity to disrupt, it is a revolution.

The growth of Strate dovetailed neatly with the rise of Blockchain in that Blockchain is a ledger that records transactions in a distributed non-centralised manner. Strate was created to move financial markets from the reliance on share certificates and cheques to a digital environment.

In law, transfers of share ownership took place when the central register held by Strate recorded the entry once the payment of the transaction was electronically done through the Real Gross Settlement System of the SA Reserve Bank. As there was no trust that the internet could be used to send and receive instructions in the financial markets, we had to use Swift (Society for worldwide interbank financial telecommunications).

Without trust we could not just allow the buyer and the seller to transact with each other. So we built layers upon layers of intermediaries. From brokers to custodian banks to a monolithic stock exchange, only certain banks were allowed to do the payments via the SARB. Strate, being the mother of all intermediaries, was the only one allowed to do the final, irrevocable entry in the ledger to record the transactions and to act as the depository i.e the keeper of the ultimate record of ownership.

This has worked very well for the past 20 years. SA is categorised as one of the best financial markets in the world. However, with Blockchain technology we now know that we can simplify the process of trading, clearing and settlement, and speed it up, as currently it takes three days from the time trading happens until clearing and settlement are effected.

Also, there is no transparency. We allowed all these intermediaries to keep the record of ownership of investors in nominee accounts. So the issuer cannot have access to real-time information about who is buying or selling its shares.

The infrastructure that the financial markets uses is very expensive. And it takes a long time for changes to be made for improved efficiencies. For example, it took more than three years for the JSE to move from five days to three days for settlement of a trade.

To benefit Luddites such as this interviewer, could you describe simply what Blockchain actually is?

Singer . . . finely tuned

Singer . . . finely tuned

It’s a software platform for digital assets. It’s the technology that underpins Bitcoin, the first crypto currency ever created. It’s also known as Distributed Ledger Technology (DLT). It uses the internet to record transactions in a distributed manner.

There is no need to have any intermediaries or “trusted third parties” because the ledger is held by the parties to the transaction on a real-time basis. Entries are recorded simultaneously and there is no need for reconciliations. You can have as many copies of the ledger as you wish. It uses a mathematical formula to ensure that the records are immutable.

The complete audit trail is maintained. Due to the multiplicity of ledgers across the internet, it is difficult to hack as the hackers would need access to more than 51% of all the ledgers that were created where the transactions are recorded and updated in real time. This technology reduces the huge challenge of having a single point of failure. Being such a single point is one of trusted centralised intermediaries’ biggest drawbacks.

What is its present state of Blockchain development in SA, and what would you foresee as its eventual or ultimate state? What sort of time periods would we be talking?

Most disappointingly, SA is falling behind in our ability to keep up with technology developments. The latest study by the IMF shows SA as one of the worst countries in the world in terms of technology advance. This worries me as we used to be amongst the leading countries, especially in the financial markets.

That is why I have joined ConsenSys, the biggest Blockchain company in the world. It created Etherum, the platform that will be used for the recording of all items of value in a decentralised manner using DLT and smart contracts.

My key role for now is to create the awareness of this technology that will change our world forever. So you could say I am an evangelist. We’ve all been riding horses. But I’ve seen the first car and the potential that the car will have on our way of life. I want everyone to see what I see, for their imagination to start creating new opportunities for all of us; where we could implement this technology in all areas to improve transparency, governance and trust as well as the quality of life for all.

Looking to the immediate future, say the next two years, who’ll be the main SA users of Blockchain?

Over the past decade, Blockchain usage has exploded. There are no signs that interest and development are diminishing. We expect that anyone and everyone can potentially use Blockchain. They’d range from merchants to banks to end-users looking to transfer value and record assets in the distributed ledger via the internet.

An ingenious part of Blockchain is that you do not need a deep-level understanding of the technology. In the same way, nobody really cares about the internet’s technology. That people will similarly learn to use Blockchain, and trust it as a ledger, is incontrovertible.

How will it impact on present methods of operation? For instance, would financial institutions – such as asset managers, collective investment schemes and life offices – need radically to amend their business models?

Potentially, the finance industry as a whole is constantly under the threat of radical technological transformation. This need not detrimental. The uses of Blockchain software will allow greater understanding of the transactions that have occurred already. Those working in the financial industry should study and embrace this technology. It will bring huge efficiencies, improved transparency and real-time access to information as well as possible cost reductions.

Any affect specifically on retirement funds?

They’ll appreciate the transaction records that provide trustees with greater peace of mind. Overall effects will be positive. Trustees should be asking their service providers to present to them on how in the future they will be embracing the benefits of this technology. To do nothing will show that the providers of services are not technologically advanced and trustees should then consider their options in selection of service providers.

Would you anticipate significant cost reductions? If so, how significant and how will they be achieved? Which categories of users will benefit?

There is the potential for cost reductions as the process is using the internet in real time without the use of intermediaries. The extent of the cost savings remains to be seen, but there is no doubt of the efficiencies and risk reductions that this technology will bring once it has matured sufficiently to deliver optimal benefits.

Anybody who won’t benefit? For instance, who are now the various intermediaries in play? What might happen to their revenues or margins?

This technology is truly disruptive. For example, why would we need a Central Counterparty in Derivatives trading and settlement if this Blockchain technology can trade, clear and settle in real time? Custodian banks will have to reconsider their roles if the record of ownership of assets will be held directly by the investor, unless the investor by choice outsources the record keeping to an intermediary. Why should Central Securities Depositories exist in the future?

There are many players that will no longer add any value to the recording of transactions. These players will therefore have to position themselves in a new role to justify their future existence.

Can Blockchain reduce the role of stock exchanges by enabling share trades directly between sellers and buyers?

There will always be a role for stock exchanges. Blockchain can enable exchanges to be more transparent, have a permanent record of trades and achieve real-time clearing and settlement of transactions. However, only exchanges that adopt this new technology will succeed. Investors will demand greater efficiencies and lower costs before they will want to trade shares as listed on traditional stock exchanges.

What then of regulatory oversight? Can Blockchain make the regulatory functions of the JSE, Financial Services Board and proposed Financial Sector Conduct Authority more or less difficult?

Regulatory oversight is vitally important in ensuring the legitimacy of our industry. The nature of Blockchain is such that all transactions are recorded so in that way it can enable a more effective regulatory oversight.

The regulators should embrace this technology. It will give them real-time access to the records of the entities being supervised. The records are immutable and do not need reconciliations. Even the traditional auditing verification process will be a thing of the past.

Do you foresee any resistance to Blockchain? If so, on what grounds? Or is it something that will simply have to be accepted to avoid competitive disadvantage?

As with any groundbreaking technology, there will be resistance. People were initially resistant to the internet and were not sure how it would benefit them in the long term.

I faced huge resistance when I had to eliminate physical share certificates and convert them into a digital record. I feel that such resistance as exists to Blockchain is based more on not understanding that Blockchain is not a cryptocurrency in and of itself. It is the software that monitors and records all transactions. We need to do a better job of educating the public.

My biggest concern is that introduction of this technology is happening at an exponential rate. At the beginning it is complex to comprehend. People should start reading whatever they can about it because it will impact on them. All relevant information is freely available on the internet.

Disruption of this nature waits for no one. Either we disrupt ourselves or we will be disrupted.

* For almost 20 years, Singer pioneered and led Strate into its recognition as one of the world’s most advanced central securities depositories. Now living in Cape Town, she has joined New York-based Consensus Systems as “creator of opportunities” and “business ambassador“ for the Blockchain applications and software systems that ConsenSys develops.