Understanding opportunities through DLT
28 Nov 2018
Bruno Campenon, head of financial intermediaries and corporates of BNP Paribas, discusses the trends he is seeing in asset servicing as well as his thoughts on the development of distributed ledger technology
Image: Shutterstock
What trends have you seen in the asset servicing space this year?
This year we have seen a more practical implication of distributed ledger technology (DLT), with companies testing real-world applications. At Sibos this year, there was a session which looked at how exchanges are considering, and, in the case of ASX, replacing existing systems with DLT models.
One element that is really interesting is bringing data to a level that’s much more understandable. In the past, it was very much about the language used, if you weren’t a rocket engineer you might not understand it.
Progressively, it’s getting to a level where we, as an industry, can understand it better.
We’re going back to basics regarding data structure and the data process, technology is now helping us structure that data.
A good example of this is a company called Fortia in which we took a stake last year. Fortia uses artificial intelligence to read documents and establish ‘actions’ based on rules included in these documents, for example, a standard key investor information document.
The new hedge hardware brought by quantum technologies and quantum concepts will bring even more capacity—by factors of millions—to artificial intelligence, accelerating the interest of such new processes, but this still needs to be stabilised.
Would you agree that blockchain has become more utilised in 2018?
In the past, blockchain was offered as a solution to many questions. Now people are a little more pragmatic and realistic, rather than just saying “any technology is an enabler”. We need not look at technology in isolation.
If you combine DLT with data management and analytics, natural language generation and artificial intelligence, and you start to have a smarter model—which addresses market efficiency on one side, and cybersecurity in terms of the safety of the asset on the other—you’ll see blockchain is just one solution, not the ultimate solution. It’s powerful, we as an industry just need to find the right way of executing it.
What will change when the Australian Stock Exchange switches on its first industrial-scale blockchain in financial services in 2021?
We’ll be able to increase the level of transparency for the end client. The Australian Stock Exchange (ASX) changing its infrastructure will make it so. ASX will also offer additional services that will be based on the ‘node’. The information related to the client’s portfolio will be available real-time and fully reconciled through the access to the blockchain via this node. That will enable us to retrieve information, work on it, run it past our clients and combine it with our data. So the added value will come from our capacity to enrich that set of data and we’ll add further value to that data with additional elements from our side. That way you can get much closer to your client in exchanging and improving information flows.
In a way, nothing could change, but everything could change. If nothing changes it means that the connectivity with our clients, or their clients, will remain the same. What will change are the possibilities available. What we can provide to the client is timeliness and a better quality of the data. The faster you give data to the client, the better they can make their investment decisions. The exercise we are going through today is to determine how much we can leverage the node to provide those added value services mentioned above to our clients.
What opportunities will it provide to the industry and what challenges will it address?
The biggest challenge that this technology is aiming to solve is moving towards real-time. Most of our clients, particularly brokers, have two main challenges.
One challenge is the level of capital required to run their activity, the second challenge is their need for intraday and overnight liquidity. Both of these challenges represents significant costs. Timely and reconciled information contributes to limiting the capital impact and liquidity requirements. There is a true opportunity here. The Central Securities Depository (CSD) can help optimise liquidity and capital through shortened settlement cycles (such as the switch from T+2 to T+1 or even T+0 settlement). The DLT is an enabler thanks to its real-time and decentralised capacity. However, technology is only one aspect to be considered.
Another source of improvement is interoperability. The aim is to, across multiple CSDs, transfer positions for a given client that is active in those markets. The blockchain nodes may help structure those transfers in real time and in a standardised and secure manner. This would have direct value on the collateral management side. So the availability of data from one market to the other should be made a little simpler thanks to the leverage of the same DLT technology across multiple markets. The standardisation would help reduce costs, as SWIFT has done for the past 30 years with messaging.
How could DLT change the custody industry by adding value and efficiency?
Interoperability is again a great way forward. The move to T+0 settlement brings cost efficiency and investments additional opportunities. Real-time data availability, data enrichment and data quality will also be key. The reconciliation is also a major plus, as data available in the nodes are reconciled by construction. Lastly, the DLT brings a strong level of security in data validity and data access.
ASX has created its DLT platform. Do you think other firms will follow in the footsteps of ASX in terms of adopting blockchain?
It would be very brave for a stock exchange not to consider a blockchain platform. Most exchanges and CSDs around the world are currently looking at it. Some are already in advanced discussions with distributed ledger companies and specialists. Some are looking at their infrastructure for tomorrow, while others are testing capacity and robustness. BNP Paribas, for one, is working with them to maximise the impact of such changes to end investors.
And how do you see it developing in five years time? Do you think the trend will move on to something else, perhaps a different kind of technology, or will it build on the foundations of blockchain?
Clearly, the ASX will be there with an expected implementation date of April 2021 for CHESS replacement. I suspect the shift of the custody industry will be very progressive and will take more than five years, given the risks and the investments involved.
More collaboration will take place between the various market actors, to generate more value for the entire industry. We should always have in mind that when market infrastructure is investing in a new technology, it’ll likely be utilised for the next 20 to 25 years. So it is a complicated decision that should not be taken lightly.
What is BNP Paribas offering in terms of corporate social responsibility?
BNP Paribas has a deep-rooted corporate social responsibility programme and is an active participant in sustainable finance. As a bank, we are fully aligned with the UN’s Sustainable Development Goals and have made significant commitments in areas such as renewable energy, where we are investing €15 billion by 2020, and to cease financing of high-polluting activities such as coal-based power plants and Arctic drilling.
BNP Paribas Securities Services very recently launched its ClimateSeed platform which connects businesses looking to offset their carbon emissions and contribute to the United Nations’s Sustainable Development Goals with project developers offering voluntary carbon credits and looking for funding.
This year we have seen a more practical implication of distributed ledger technology (DLT), with companies testing real-world applications. At Sibos this year, there was a session which looked at how exchanges are considering, and, in the case of ASX, replacing existing systems with DLT models.
One element that is really interesting is bringing data to a level that’s much more understandable. In the past, it was very much about the language used, if you weren’t a rocket engineer you might not understand it.
Progressively, it’s getting to a level where we, as an industry, can understand it better.
We’re going back to basics regarding data structure and the data process, technology is now helping us structure that data.
A good example of this is a company called Fortia in which we took a stake last year. Fortia uses artificial intelligence to read documents and establish ‘actions’ based on rules included in these documents, for example, a standard key investor information document.
The new hedge hardware brought by quantum technologies and quantum concepts will bring even more capacity—by factors of millions—to artificial intelligence, accelerating the interest of such new processes, but this still needs to be stabilised.
Would you agree that blockchain has become more utilised in 2018?
In the past, blockchain was offered as a solution to many questions. Now people are a little more pragmatic and realistic, rather than just saying “any technology is an enabler”. We need not look at technology in isolation.
If you combine DLT with data management and analytics, natural language generation and artificial intelligence, and you start to have a smarter model—which addresses market efficiency on one side, and cybersecurity in terms of the safety of the asset on the other—you’ll see blockchain is just one solution, not the ultimate solution. It’s powerful, we as an industry just need to find the right way of executing it.
What will change when the Australian Stock Exchange switches on its first industrial-scale blockchain in financial services in 2021?
We’ll be able to increase the level of transparency for the end client. The Australian Stock Exchange (ASX) changing its infrastructure will make it so. ASX will also offer additional services that will be based on the ‘node’. The information related to the client’s portfolio will be available real-time and fully reconciled through the access to the blockchain via this node. That will enable us to retrieve information, work on it, run it past our clients and combine it with our data. So the added value will come from our capacity to enrich that set of data and we’ll add further value to that data with additional elements from our side. That way you can get much closer to your client in exchanging and improving information flows.
In a way, nothing could change, but everything could change. If nothing changes it means that the connectivity with our clients, or their clients, will remain the same. What will change are the possibilities available. What we can provide to the client is timeliness and a better quality of the data. The faster you give data to the client, the better they can make their investment decisions. The exercise we are going through today is to determine how much we can leverage the node to provide those added value services mentioned above to our clients.
What opportunities will it provide to the industry and what challenges will it address?
The biggest challenge that this technology is aiming to solve is moving towards real-time. Most of our clients, particularly brokers, have two main challenges.
One challenge is the level of capital required to run their activity, the second challenge is their need for intraday and overnight liquidity. Both of these challenges represents significant costs. Timely and reconciled information contributes to limiting the capital impact and liquidity requirements. There is a true opportunity here. The Central Securities Depository (CSD) can help optimise liquidity and capital through shortened settlement cycles (such as the switch from T+2 to T+1 or even T+0 settlement). The DLT is an enabler thanks to its real-time and decentralised capacity. However, technology is only one aspect to be considered.
Another source of improvement is interoperability. The aim is to, across multiple CSDs, transfer positions for a given client that is active in those markets. The blockchain nodes may help structure those transfers in real time and in a standardised and secure manner. This would have direct value on the collateral management side. So the availability of data from one market to the other should be made a little simpler thanks to the leverage of the same DLT technology across multiple markets. The standardisation would help reduce costs, as SWIFT has done for the past 30 years with messaging.
How could DLT change the custody industry by adding value and efficiency?
Interoperability is again a great way forward. The move to T+0 settlement brings cost efficiency and investments additional opportunities. Real-time data availability, data enrichment and data quality will also be key. The reconciliation is also a major plus, as data available in the nodes are reconciled by construction. Lastly, the DLT brings a strong level of security in data validity and data access.
ASX has created its DLT platform. Do you think other firms will follow in the footsteps of ASX in terms of adopting blockchain?
It would be very brave for a stock exchange not to consider a blockchain platform. Most exchanges and CSDs around the world are currently looking at it. Some are already in advanced discussions with distributed ledger companies and specialists. Some are looking at their infrastructure for tomorrow, while others are testing capacity and robustness. BNP Paribas, for one, is working with them to maximise the impact of such changes to end investors.
And how do you see it developing in five years time? Do you think the trend will move on to something else, perhaps a different kind of technology, or will it build on the foundations of blockchain?
Clearly, the ASX will be there with an expected implementation date of April 2021 for CHESS replacement. I suspect the shift of the custody industry will be very progressive and will take more than five years, given the risks and the investments involved.
More collaboration will take place between the various market actors, to generate more value for the entire industry. We should always have in mind that when market infrastructure is investing in a new technology, it’ll likely be utilised for the next 20 to 25 years. So it is a complicated decision that should not be taken lightly.
What is BNP Paribas offering in terms of corporate social responsibility?
BNP Paribas has a deep-rooted corporate social responsibility programme and is an active participant in sustainable finance. As a bank, we are fully aligned with the UN’s Sustainable Development Goals and have made significant commitments in areas such as renewable energy, where we are investing €15 billion by 2020, and to cease financing of high-polluting activities such as coal-based power plants and Arctic drilling.
BNP Paribas Securities Services very recently launched its ClimateSeed platform which connects businesses looking to offset their carbon emissions and contribute to the United Nations’s Sustainable Development Goals with project developers offering voluntary carbon credits and looking for funding.
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