Where Finance Finds Its Future


Is it the destiny of Blockchain to become the Open Infrastructure?

Season 1, Ep. 113

A Future of Finance Webinar that investigates whether the adoption and impact of Blockchain could be accelerated by pursuing an infrastructural strategy that lowers the cost of adoption, recovers the openness of the early Internet and facilitates inter-operability between different networks. A major economic mystery is why a general-purpose technology such as digital computing has not transformed productivity. After all, the marginal cost of producing further copies of software is effectively zero. Part of the answer, despite 25 years of the Internet and open-source software, is that software lacks an open infrastructure akin to the electricity grid or the road network. A true infrastructure is a shared and (crucially) open means to many ends. It creates value obliquely rather than vectorally, by enabling third party businesses and entrepreneurs to create new and innovative products and services on a reliable and low-cost foundation. Instead, the value created by digital technology is currently being privatised, chiefly by the massive data extraction platforms such as Facebook, Google, Microsoft, Uber and Airbnb, which have used network effects to build powerful monopolies. Although they do provide platforms for third-party businesses to advertise and sell, they take a turn on transactions, extract data from transactions for sale to third parties and suppress innovation through a combination of patents, purchases and the blight cast on innovation by their sheer size and invulnerability. A true infrastructure would spawn a constant series of innovations, as the electricity grid did and does (including, ironically, digital computing). And there are now signs that just such an infrastructure is coming into being in the financial markets. Open Banking and Open Finance are prising open the closed customer bases and data sets of incumbent firms, presaging the emergence of an Open Data economy in which customers rather than companies drive the evolution of economies. Forward-thinking financial institutions (such as LSEG) are embracing this shift from data platforms to open data networks by introducing their clients to third party product and service providers via a blockchain-based network. Blockchain is an obvious rather than inspired choice to fulfil the role. It is intrinsically decentralised and networked. At its heart lies the concept of simultaneous data-sharing. So Blockchain is the natural infrastructural underpinning of the networked markets that are now primed to succeed the platforms controlled by the large technology companies. Unfortunately, Blockchain has until recently succumbed to the same supply-side economics that has prevented previous digital technologies from transforming productivity: networks are fragmented by incompatible protocols designed to privatise and protect the profits of successful blockchain ventures. But there is work in hand today that is enabling blockchain to rediscover its original vocation. Efforts to bridge protocols by agreed data communication standards is one part of it. But there are also collaborative public-private enterprises such as the LACChain Alliance in Latin America, Alastria in Spain and the Blockchain Services Infrastructure (EBSI) in the European Union (EU) which aim to provide open, low cost blockchain infrastructures to innovative businesses.

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Data provides the prices that drive activity in tokenised asset markets

Season 1, Ep. 119
Liquidity in privately managed assets is hampered by a lack of reliable and timely data about asset values. If value is hard to discern, privately managed assets are more difficult to buy and sell, harder to use as collateral and suffer from a less favourable accounting treatment. It is also difficult to develop secondary markets in which the assets can be traded. A distributed technology such as blockchain is well-adjusted to capturing, validating and then distributing data scattered across multiple databases, within as well as between institutions. It enables Inveniam to deliver the data needed to value private managed assets regularly, frequently and reliably without the need to centralise it in a single data warehouse.The data garnered by Inveniam is used by orthodox valuation agents such as Cushman & Wakefield, CBRE, Houlihan Lokey, Mercer and others to mark privately managed assets to market on behalf of their buy-side clients. The data enables the valuation agents to provide a faster, more frequent and more reliable valuation service to their clients. Where privately managed assets such as real estate, infrastructure and private equity can be marked to market daily, weekly, monthly or quarterly, by an independent third party and at low cost through the use of technology to retrieve and process data from widely distributed and highly variegated systems, two-sided markets can develop to facilitate price discovery.Accessible, reliable data improves valuations and makes two-sided markets possible, but liquidity ultimately depends on the engagement of market-makers with tokenised asset classes. They have already engaged with the cryptocurrency markets and can be expected to engage with the security token markets once issuance volumes gain sufficient momentum.The emergence of two-sided markets on blockchain-based networks will attract issuers of privately managed assets and funds invested in privately managed assets in tokenised form, because better functioning markets will lower the cost of raising and servicing capital (for example, paying dividends). Estimates indicate savings of between 20 and 50 basis points.Real estate will pioneer the tokenisation of privately managed assets in the United States because the impact of more accurate, frequent and independent valuations in reducing the capital financial institutions must allocate to the asset class is so dramatic. Similar benefits will accrue to holders of infrastructure and private equity investments as well.Reliable valuation data also cuts the cost of fund accounting or calculating the Net Asset Value (NAV) of a fund. If the cost of the NAV is borne by the fund, it lifts returns. If it is borne by the management company, it widens margins for general partners (GPs). With independent valuations, it also becomes easier to post fund units as collateral for margin loans.In the United States, the Decentralised Autonomous Organisations (DAOs) that issue tokens to raise funds and use smart contracts to service the tokens are now obtaining formal legal recognition. Three states have granted DAOs legal status and the leading jurisdiction for publicly traded corporations (Delaware) is expected to follow suit.