Back

New kid on the block: how will DLT and digital assets disrupt financial services?

By Rolf Merchant, Innovate Finance on 12/02/20

Financial technology promises many big shifts from better consumer experience to more efficiency in capital markets. Of all the changes that we might see in the 2020s, distributed ledger technology (DLT) and the advent of digital assets could easily be the most revolutionary. 

Blockchain and DLT have started to slowly take root, if not at the pace some predicted. 

So how much adoption has there been of these technologies? Looking at the bigger picture, is a decentralised finance revolution likely? And where will regulation come in to this entirely new financial services framework? 

To answer these questions and more, Innovate Finance put together its latest “Spotlight On…” series to shine a light on blockchain, DLT and digital assets. We were kindly hosted by DLA Piper at their offices in Barbican for the evening’s event. 

Janine Hirt, COO of Innovate Finance, set up the discussion by highlighting some of the most striking findings from a recent Bank of International Settlements report on central bank digital currencies. The report said 80% of the central banks surveyed were involved in some form of work connected to digital currencies, 30% said they have active plans to issue a digital currency, and 10% are hoping to issue a digital currency by as soon as 2023. 

Janine also touched on a hot topic in blockchain – the potential for Decentralised Finance (DeFI) to dramatically increase financial inclusion across the globe – which we heard more about during the panel discussion. 

Demos:

Before the panel, we heard presentations from three Innovate Finance FinTech Members using blockchain technology.

Nikola Tchouparov, CEO, Moneyfold, gave an overview into how his business makes fiat money composable and eligible for use in the open finance stack through the use of public permissionless blockchains. 

Rashid Hoosenally, Co-Founder and CEO, Lacero, a governance, compliance and control for digital assets. 

Ben Tahir, Senior Manager Corporate Accounts at Fidor Bank, told us about the bank’s API banking services, including those enabling real-time crypto transactions between customers. 

Panel:

The following panel session focused on the broader topics of DLT disruption and decentralised finance. 

Bryony Widdup, Partner at DLA Piper moderated the panel, which featured representatives for four Innovate Finance member companies: Daniel Coheur, Chief Commercial Officer at Tokeny; Anna Flach, Head of Marketing and Communications at Qadre; Swen Werner, Managing Director, Digital Product Development and Innovation at StateStreet; Dmitry Lazarichev, Founder & CEO at Wirex

Bryony opened the discussion by asking the panel to give their view on how best to differentiate between disruption caused by DLT and the implementation of decentralised finance. 

Swen, giving the point of view of a regulated financial institution, said that State Street had been looking at blockchain and DLT for some time. Swen argued that in one sense blockchain is a benign technology to improve product and services, but in another it could lead to a totally decentralised peer-to-peer network for finance, where intermediaries like banks are no longer needed. 

Turning to the question of whether DLT disruption in financial services is a catalyst for the DeFi revolution or in fact a barrier, Anna Flach suggested it is more accurate to say they are acting remotely and in parallel. While DLT is driving new products in financial services right now, DeFi is a far more radical and distant idea, Anna said. 

Bryony asked Dmitry from Wirex to give his view on the main opportunities and benefits with DeFi. Dmitry started by reminding us that it is still early days; at the moment, digital assets are largely connected to lending or borrowing. He added that it’s important to remember that there is still a lot of risk with this technology and it is unclear what direction regulation will take in response.

That point led the discussion onto regulation, specifically whether regulation is a barrier or a welcome check and balance. Daniel Coheur of Tokeny touched on the fact that with smart contracts there is a way to use blockchain technology to enforce or guarantee rules. Daniel went on to say that this leads to the bigger question of whether when using blockchain we need to worry about managing risk. His view is that the answer is an obvious “no”, since the power of the technology will remove the need for actors like custodians in risk management. 

For Anna Flach, the ICO craze of 2017 – and the scams and scandals involved – serves as a big reminder that regulations are there for good reason: to protect consumers. 

Bryony posed further questions on regulation in a decentralised world: how do you identify the right person to enforce against? What happens when there is bad behaviour on a network but no central counterparty to control? And what else might need to happen in the broader financial ecosystem for DeFi to really take off? 

Swen Werner argued that a new form of regulatory thinking is needed. He used the example of a smart contract to ask how a user will know it will work and what they can do if it doesn’t. Swen said such issues simply don’t register in today’s regulatory framework, so a huge push is needed to change that. 

Q&A:

The discussion was opened up the floor to ask questions to the panel, who were first asked how the financial industry will handle redundancies caused by blockchain cutting out so many parts of the value chain. 

Anna Flach suggested that plenty of new jobs will be created through the deployment of new technology and that we should see it as something akin to another industrial revolution. 

Daniel Coheur added that the number of new assets coming into existence will create huge opportunities. Daniel thought that blockchain will also drive more digitalisation in the industry, pointing out that Excel is still the single most-used tool in financial services, and some firms still send faxes! 

A member of the audience asked whether DLT will drive so much efficiency that financial services workers will end up having more leisure time. The panel certainly hoped that would be the case! However both Anna Flach and Dmitry Lazarichev feared it could have the opposite effect, much in the same way that mobile phones and laptops have meant we are “on the grid” 24/7. 

The last two points concerned regulation – specifically whether self-regulation will be possible, and if not, what regulations are closest to coming into force for digital assets. 

Bryony Widdup argued that since it is very difficult to translate centralised regulatory concepts into the front line of technology, some form a supported self-regulation may be the best route forward. The panel agreed that initiatives like sandboxes are a means to start and maintain a regular discourse on DLT regulation. 

Our panel’s future-gazing revealed what might just be possible in a DLT-powered financial world. Full-blown revolution feels remote at the moment but there is undoubtedly plenty of excited interest in blockchain technology and more and more fascinating applications coming to market. 

No one has a crystal ball, of course, but there is no doubt that this sub-sector of FinTech deserves close attention. Big changes may be closer than we think.