Evolution or revolution?

Distributed ledger technologies in financial services

Anil Savio Kavuri 1 and Alistair Milne 2

(There are two versions of this paper: a short summary report of 16 pages plus
references; the full research report of 121 pages plus references.)

1
Loughborough University and Australian National University. [email protected]
2
Loughborough University. [email protected]
 Evolution or revolution?
Distributed ledger technologies in financial services

Contents of full report

1 Introduction to the full report............................................................................................... 2
2 Distributed ledgers: basic concepts and supporting technologies. ...................................... 5
2.1 Definitions....................................................................................................................... 5
2.2 The component technologies used in distributed ledgers ............................................. 7
2.3 How the technologies are combined: the database ‘stack’ ........................................... 8
3 Applications of distributed ledgers in financial services ..................................................... 11
3.1 Fourteen areas of application....................................................................................... 11
3.2 Seven case studies ........................................................................................................ 38
4 Distributed ledgers: the adoption decision......................................................................... 55
4.1 The benefits of distributed ledger technologies .......................................................... 55
4.2 Costs and benefits of adoption..................................................................................... 59
4.3 Radical versus limited adoption ................................................................................... 60
4.4 Distributed ledgers: not necessary to delivering all their perceived benefits ............. 63
4.5 Shared multiparty versus single party governance ...................................................... 65
4.6 The challenges of data management. .......................................................................... 67
5 Distributed ledgers and public policy .................................................................................. 71
5.1 The legal and regulatory treatment of crypto assets ................................................... 71
5.2 Encouraging adoption................................................................................................... 72
5.3 Radical reform?............................................................................................................. 73
6 Conclusions.......................................................................................................................... 76
Appendix 1: Announced distributed ledger initiatives in banking and capital markets ............. 78
Appendix 2: the legal and regulatory treatment of ‘crypto assets’. ......................................... 114
A. What are crypto assets? ............................................................................................. 114
B. Legal and regulatory classification of crypto assets ................................................... 117
C. Other regulatory concerns ......................................................................................... 119
References ................................................................................................................................. 123

1
1 Introduction to the full report
Over the past five years there has been a lot of discussion of cryptocurrencies and their
supporting ‘blockchain’ or ‘distributed ledger’ technologies. 1 While the opportunities of
‘crypto’ as an asset class have attracted most media attention, for many practitioners and
policy makers it is the technologies that are of greatest interest. Over one hundred announced
projects have invested hundreds of millions of dollars applying distributed ledger/ blockchain
in mainstream financial services. 2 A handful of projects are reaching commercial scale.

This report examines the adoption of distributed ledgers in financial services, both what has
taken place to date and prospects for the future.3 Are distributed ledgers, as some suggest, a
radically disruptive technology that will transform banking, insurance, capital markets and
asset management?4 Or are they supporting tools, to be gradually deployed in a range of
applications but without fundamentally changing the industry?

Our investigation is both conceptual and empirical. We discuss the distinguishing features of
distributed ledgers. This has required grappling with considerable terminological confusion.
Practitioners and technologists use the terms distributed ledger, distributed ledger
technologies (or DLT) and blockchain in different ways, sometimes with no precise meaning at
all and on other occasions consciously departing from the ways in which these terms are used
and understood by others. We provide definitions of these key terms correspond to their most
common usages, but also note where usage varies.

Do these definitions matter? Proponents of the application of distributed ledgers in financial

services may argue that accurate definition matter less than practical application. This though
masks an important practical issue, one that helps explain why there is so much confusion
about distributed ledgers. There is no single distributed ledger technology, rather distributed
ledgers are a ‘pick and mix’ solution using modern cryptographic security tools to address an
old challenge of sharing business and operational data. Each distributed ledger is a
combination of technologies tailored to the requirements for sharing data in a particular
business situation. One distributed ledger solution can be very different from another. There
is often little commonality between them.

To make sense of this complexity, our analysis is founded on a detailed review of what is going
on in practice, looking at: the many ‘blockchain’ start-ups; the work of the various distributed
ledger consortia (R3, Distributed Assets, the Ethereum Enterprise Alliance and the participants
in Hyperledger). We look at the application of distributed ledgers in fourteen different areas
of financial services; and in a little more detail at seven case studies of more developed
implementations of distributed ledgers.

Our emphasis throughout is on the business and operational applications of distributed

ledgers, not technical implementation. We think our analysis is long enough, without paying
unnecessary attention to technical details, for example to the supporting cryptography, to the

1
Google Trends reveals a thirty-fold increase in searches for the terms “blockchain” and “distributed ledger” from
January 2015 to Dec 2017, falling back a little since as the cryptocurrency prices fell from their end-2017 peaks.
2
Documented in Appendix 1. This count excludes cryptocurrency and crypto asset projects.
3
There is so much activity of this kind that we have not been able to cover all current developments, for example
Facebook’s Libra project, announced in June of 2019, is not covered in this report.
4 Our focus is on financial services. There are also many applications in both non-financial industries and public
administration, e.g. health records, supply chain transparency, see (Government Office for Science 2016).

2
establishment of ‘consensus’ across the multiple distributed copies of a distributed ledger or
the fashionable references to ‘tokenisation’ of financial transactions (a shorthand for
automation of operational processes through digital record keeping). For decision makers this
is the appropriate focus: balancing the benefits of using a distributed ledger for data sharing
and on the associated costs, both the one-off costs of system change and the ongoing costs of
ledger governance, without getting diverted into excessive detail of the supporting
technology.

We do examine in detail the adoption decision: when is a distributed ledger solution business
relevant? what must be taken into consideration when making the decision to adopt? We find
that adoption of distributed ledger technologies is appropriate when existing arrangements
for sharing of data are insufficient and the additional costs of governance and replacing legacy
arrangement to support a shared arrangement are justified.

We also argue that adoption of distributed ledgers is not something to be left solely to the
initiative of market participants. Adoption requires co-ordination and overcoming vested
interests which in turn can justify promoting adoption through regulatory initiative or other
public policy intervention. Distributed ledgers may support radical improvement in the
organization and structure of financial services, but in our view more radical change is only
going to take place through public policy leadership.

Our paper is organised as follows. Section 2 discusses the key features of distributed ledgers
and what distinguishes them from other forms of databases. We offer definitions
distinguishing distributed ledgers from distributed ledger technologies. Distributed ledgers
are permanent, tamper-proof, sequences of data records with (i) multiple operators storing
copies of the ledger and independently adding data records; and (ii) multiple users reading
and proposing new data records. Their key distinguishing feature is having multiple operators
– but there can also be multiple users of conventional databases each with a single operator
and these are often also referred to as distributed ledgers. This section also: discusses the
range of component technologies and how they are combined in ledger operation (the ‘data
base stack’).

Section 3 is our examination of how distributed ledger technologies are actually being
employed in financial services. We first offer a general overview, looking at applications in
fourteen broad areas, summarised under four main headings (see Table 2): A. Asset ownership
and management; B. Trading and Derivatives; C. Corporate Financial Services; and D.
Regulatory oversight. We then summarise seven major ongoing initiatives in the application
of distributed ledger in financial services, those we have identified as coming near to
commercial scale: these are the Digital Asset/ ASX project on upgrading of the Australian post-
trade securities clearing and settlement; DTCC’s TIW for trade information; Utility Settlement
Coin or as it is now named Fnality in the cash payment leg of securities settlement; SETL’s
IZNES platform for pan-European investment funds record keeping; J.P. Morgan’s Interbank
Information Network (IIN) to support international payments and Ripple’s RippleNet suite of
solutions for international payments. We choose these because they are the most prominent
projects that are moving beyond proof of concept to commercial scale implementation
(though even for these early first movers, implementation may still take some years). We also
discuss why implementation is protracted and as yet limited to only a few areas of application.

3
Section 4 examines the adoption decision for potential applications of distributed ledgers – or
other advanced technology data solutions in financial services. Where does sharing of data
offer the largest potential private and social gains? We argue that this is where data is
currently most fragmented and difficult to deal with. We also examine the issue of limited
versus radical change. Yes, distributed ledgers can deliver substantial operational efficiencies
and promote greater competition; but reshaping and improving the institutional architecture
of financial services is a much bigger task, requiring far more than just the employment of a
new form of database. Finally this section examines the governance of distributed ledger and
the associated challenges of data management.

Section 5 briefly discusses the public policy issues associated with distributed ledgers in
financial services, the legal and regulatory treatment of crypto assets, the use of distributed
ledgers in financial regulation and central banking and the role of public policy in promoting
adoption. Section 6 is a concluding summary. Our analysis is supported by two Appendices.
Appendix 1 is a review of announced distributed ledger/ blockchain initiatives in financial
services. Appendix 2 is a summary of legal and regulatory perspectives on ‘crypto-assets’.

4
2 Distributed ledgers: basic concepts and supporting technologies.
This section outlines the key technological elements employed in distributed ledgers (with a
conscious effort to avoid being side-tracked by unnecessary technical details). A main finding
is that users seeking to achieve the benefits of distributed ledger do not have to buy into the
overall concept: a data base with no central operator; they can select the technological
elements relevant to their particular use case and, if they prefer, apply them using a more
conventional database maintained by a trusted party.

2.1 Definitions
We begin with definitions of three key terms. 5

First a definition of a distributed ledger: 6

DEFINITION 1: (not universally accepted) A distributed ledger (DL) is

a database of cryptographically-secured time-ordered immutable
data records, with multiple operators storing and independently
updating their own copies of the database and multiple users
reading and proposing the addition of new data records.

This definition emphasizes that distributed ledgers are databases and focuses attention on
rights for reading and updating of records and on data integrity and security. It also identifies
a critical distinguishing feature: multiple operators i.e. distributed ledger provides a complete
record of past data without a single controlling institution. Note that permissioned versions of
DL required for application in mainstream financial services (see later discussion) still require
some institutional control over participation. This definition captures the key features
associated with DL, but it is not universally accepted. As we discuss many data solutions
described as DL or DLT fall outside of this definition.

It is helpful to distinguish distributed ledgers from both distributed ledger technologies and
from blockchains:

DEFINITION 2: Distributed ledger technologies (DLT) are the range of

component technologies employed in distributed ledgers, delivered
through a common software environment.

A range of software environments for distributed ledger technologies have been developed
over the past five years. The best known are Hyperledger, Ethereum (e.g. in its permissioned
Quorum implementation), R3’s Corda and Distributed Asset’s DAML. As we document below,

5
The terminology itself is not so important – in the words of Shakespeare’s Juliet ‘What’s in a name? A rose by any
other name would smell as sweet.” Disagreement on terminology can though result in confusion. In our judgement,
the current efforts at developing distributed ledger solutions in financial services have become something of a
‘Tower of Babel’, with much discussion undermined by failure to agree on what exactly is meant. We therefore
propose the following definitions, while acknowledging that others may sometimes use the same terms differently
from us.
6
The danger of such distraction is especially great over synchronization – i.e. element (iv) – which is where the
energy intensive process of Bitcoin mining or other forms of proof of work have been employed.

5
 all four are becoming widely used in financial services but more often for shared ledgers with
central institutional control rather than for distributed ledgers proper. They can all support
secure data sharing solutions that would be relatively difficult to implement using
conventional database software. The reason, though, for calling them all distributed ledger
technologies seems to be more about persuading company boards to agree to substantial
expenditures on new technology. They are less about providing a precise description of what
is being done.

Blockchains are the class of distributed ledger technology supporting cryptocurrencies: 7

DEFINITION 3: A blockchain is an implementation of a DL with an

append-only chain of cryptographically-linked secure ‘blocks’ of
data, open for any participant to read and propose changes to data
records, without reference to their real world identities and with
consensus established entirely through the supporting software
without any additional institutional responsibilities.

These are the definitions of the three terms “Distributed Ledger”, “Distributed Ledger
Technologies” and “Blockchain” employed in the rest of this paper. These most appropriate
definitions for our analysis – but consensus on these key terms has not yet been established.

Here are some other perspectives inconsistent with our proposed definitions:

• It is quite common to see references to ‘the blockchain’ (as in “the asset holdings will
be recorded on the blockchain”). This is typically just a mistake. There are many
different distributed ledgers and blockchains so what is probably really meant is just ‘a
blockchain’. 8

• Our definition of blockchain is limited to ‘unpermissioned’ implementations of

distributed ledgers’ – those where anyone can join. 9

• Some proponents of the use of distributed ledgers, especially those who see substantial
business and customer benefits from the application of smart contracts, prefer an even
broader interpretation of distributed ledger than we do – including also databases with
a single operator with data shared amongst multiple users. A long-established example
of such shared databases are the global distribution systems (e.g. Amadeus, Sabre,
Galileo) used for sharing details of flight reservations amongst airlines, booking agents

7
This is consistent with the more technical definition of (Rauchs et al. 2018): “An append-only chain of
cryptographically-linked ‘blocks’ of data, maintained and updated by a decentralised network, with network nodes
encouraged by economic incentives to engage non-strategically to maintain and secure the system so that the data
- organised in a specific structure often referred to as ‘global ledger’ - is robust to adversarial interference, double-
spend, censure, counterfeit, collusion, tampering, or other types of malicious actions.”
8
Where it is not simply a mistake, “the blockchain” could be a reference to the original blockchain used to support
Bitcoin ownership and transactions OR to a futuristic (and in our view unlikely) world in which one single distributed
ledger dominates global sharing of data, much as today “the internet” dominates global communication.
9
There are many though who refer to ‘permissioned blockchains’, on the grounds that permissioning is required for
application in regulated financial services. While we agree that permissioning is necessary for application in
regulated financial services, we believe that confusion is minimised by avoiding associations with unpermissioned
cryptocurrencies and hence we restrict the use of the word blockchain to unpermissioned ledgers.

6
 and air travellers. These have a single operator updating the central master copy of the
database, rather than multiple operators updating multiple copies of the data base – so
we prefer to call these shared databases not distributed ledgers. But others, for
example some vendors we assume for marketing reasons, describe similarly controlled
single operator database solutions supporting smart contracts as distributed ledgers
not as shared databases.

2.2 The component technologies used in distributed ledgers

Distributed ledgers combine a range of cryptographic and other tools. 10 We distinguish nine
component technological elements (Table 1).

Table 1: the nine elements sometimes used in distributed ledgers

Core functionality (required under Definition 1)
1. Multiple, identical, copies of a computer‐readable database
2. Multiple operators responsible for updating the ledger, no central operator
3. Complete time‐ordered immutable records containing the entire data history
4. Individually specified rights for reading and for instructing changes to the ledger
allocated amongst multiple users (essential)
Supporting technology
5. Synchronization (or a ‘consensus mechanism’) avoiding inconsistent versions of the
ledger.
6. Identification of users and operators through public cryptographic keys, linked as
required in the design of the ledger to real-world identities (essential)
Additional technological elements
7. The possibility (not a requirement) of a ledger specific asset ‘owned’ by users
8. Incorporation of extra‐ledger information in ledger entries or user keys
9. Potential for algorithmic updating of the ledger based on its current state (what are
often referred to as ‘smart contracts’).

The first four of these elements – (i) multiple, identical, copies of the ledger; (ii) multiple
operators instead of a central operator (iii) time-ordered records containing the entire history of
the data; and (iv) allocation of rights for reading and for instructing changes to the ledger
amongst multiple users – are core functions. The benefits possible from these core functions are
the reason for the huge interest in distributed ledgers. There is also though the possibility of
providing many of these functions using a single central operator – although this would not be a
distributed ledger in some contexts this is as good or an even better solution for users.

10
Some insight can be obtained from comparing distributed ledger technologies with the technologies of the
internet and the world wide web (see for example Ito, Narula, and Ali 2017). The internet is also supported by a
combination of technologies (a communication layer that carries messages e.g. by Ethernet; IP the internet
addressing protocol used for directing packets of data to their recipient on the network; TCP the ‘transport
communication protocol’ that ensures that the data in the packets of data reach their destination complete and in
the correct order; and application layers such as HTML for webpages and IMAP or POP for email; together often
described as ‘the internet stack’). The difference is that the core elements of distributed ledger can also be
implemented separately – e.g. there is no need to have multiple copies of the ledger in order to allocate individual
user rights or record a complete time-ordered history of the data.

7
The next two – (v) operational updating and synchronizing; and (vi) identification – are
necessary supporting elements. The remaining three are additional functions important for
particular distributed ledger applications.

Note that the four core functions of Table 1 are all embodied in our definition of distributed
ledger (Definition 1). Not all core functions however are novel. For example, arrangements for
allowing multiple users to access and process records of security holdings have been employed
since the mid-1970s in major financial markets.11

A widely discussed distinction is between unpermissioned and permissioned ledgers:

• an unpermissioned ledger is one in which anyone can join the network of users
without having to provide a real-world identity (for example the Bitcoin blockchain).
• a permissioned ledger is one in which operators and users must provide real world
identities for permission to join the network

There has been extensive discussion by technical experts of consensus in unpermissioned

ledgers, addressing the slow speed, high costs, environmental damage and lack of scalability of
Bitcoin blockchain ‘mining’ (a proof of work scheme) and possible alternatives (based on proof
of stake). 12 Ongoing technological innovation has led to recent development of several, more
efficient alternatives to blockchain, supporting lower cost, faster and more scalable consensus,
such as DAG (Directed Acyclical Graphs) or Hashgraphs as well as the locally based consensus
mechanisms of Ripple and Stellar. 13

In business and public administration application, which require known real world identities,
these debates over consensus and proof of work are of little relevance. Conventional tools of
law, regulation and administrative command can ensure acceptable behaviour and prevent
malicious network participants threatening the integrity of the ledger. The costs of such control
can be further reduced by partial centralization, for example giving a small number of privileged
network members the role of validating write instructions. 14

2.3 How the technologies are combined: the database ‘stack’

To discuss the different ways in which the supporting composite technologies can be combined
together in distributed ledger operations, we distinguish five different layers of the distributed
ledger ‘stack’ (Figure 1).

The key points we will make using this figure are: (i) this ‘stack’ applies also to conventional
databases; and (ii) the degree to which a particular layer is centralized and whether the

11
These decentralised (but not distributed) arrangements for recording security ownership since the mid-1970s
bring to our minds the words of Monsieur Jourdan in Moliere’s 1670 play Le Bourgeois Gentilhomme “Well, what
do you know about that! These forty years now I’ve been speaking in prose without knowing it!”
12
Consensus in an unpermissioned network requires addressing the possibility that a malign network participant or
group of malign participants could replace the true version of the ledger with a previously hidden false version, for
example through a so called ‘sybil attack’ creating and controlling large numbers of new network nodes. Proof of
work – or mining i.e. a costly expenditure to achieve a randomly allocated right to extend the network to the next
‘block’ – together with a rule that the longest of two competing versions of the ledger is treated as authentic,
ensures that such replacing the established version of the network with an alternative requires control over 50% of
the resources devoted to proof of work. See (Narayanan et al. 2016) for more detailed description.
13
See (Anwar 2018) for a succinct summary and discussion.
14
An example is the validation of the Ripple network transactions.

8
database is a distributed ledger or a conventional database is less important than the services
it provides and the security it offers

Figure 1: the 5 layers of distributed ledgers

and conventional databases.
Governance layer

central bank
Software layer

Example:
Example:

reserves
crypto-
i Authorization layer
Data access and updating layer
Data storage layer

Decentralized/ Distributed

Note: This figure extends the distinction of (Rauchs et al. 2018, esp Section 4.1.4) between the data, network and
protocol layers of distributed ledgers. Their data layer are the records held on the ledger i.e. our data storage layer.
Their network layer is the interaction amongst the different network participants who access the distributed
ledger. We divide this network layer into two: the authorization layer (determining the status and participation
rights of different participants in the network, both users and operators) and the data access and updating layer
(access to data and issue of instructions for adding new records from network participants and actions taken by
network operators to update data records). We also divide their protocol layer into two, distinguishing the
software controlling the participation and data processing layers and a governance layer operating outside the
software. A governance layer is needed since not every ledger action can be fully software controlled (e.g.
agreement on participation or software changes).

The similarities of distributed ledgers and conventional databases

Figure 1 applies both to distributed ledgers and to conventional and more widely used
relational databases, where records are maintained in multiple tables (e.g. one for customer
records, another for orders, yet another for invoicing and payments etc. and keys used to cross
refer between tables and allow users to extract different views or summary information from
the databases according to their particular needs). This difference in structure suggests that
distributed ledgers are a major departure from conventional database design. 15

The distinction between distributed ledgers and conventional databases is not though so clear
cut. Nowadays commercial and administrative data is frequently stored in multiple copies, for
example cloud storage alongside local versions, and accessed by multiple users (though only
one operator makes changes). As capacity and costs of storage have fallen it is now much more
feasible than in the past to maintain a complete record of past information. Modern
cryptography makes it possible to provide many users with access to a database, while limiting
their access to specific read or write permissions. There is no insuperable technological barrier
to offering multiple user access to a relational database or maintaining a complete time-
ordered version of a relational database recording all past versions. In short, the technical
features of distributed ledgers, (i), (ii) and (iii) of Table 1 are not unique to distributed ledgers.
They can all also be provided by conventional databases. Only when it is essential having a
single operator is a distributed ledger required.

Different degrees of centralisation

15
(Rauchs et al. 2018) Figure 1 is an example; (Mainelli and Milne 2016) Table 1 is another.

9
Figure 1 focuses attention on different possible degrees of centralization:
• Unlike a conventional database with a single operator and a centralized data storage
layer, there can be many operators and no central master copy of a distributed ledger.
The data storage layer is decentralized or ‘distributed’ amongst the operators who all
add ledger records. But the extent of this decentralization can vary. The original
unpermissioned cryptocurrency blockchains have a fully decentralized data storage
layer – all users are also operators. Commercial applications using permissioned ledgers
have relatively few operators, so the data storage layer is only partially decentralized. 16
• Partial decentralization is possible within other layers: e.g. responsibility for updating
records in the data storage layer or the allocations of permissions in the authorization
layer limited to a subset of participants; the software and governance layers might be
centralized or partially centralized (a single institution or subset of participants deciding
the design of the ledger) even when other layers are decentralized;

There are further important differences between distributed ledgers and conventional
databases are at the higher software and governance layers. All use of a distributed ledger is
within a single software environment. This helps supports greater transparency and security.17
This also requires clearly articulated shared governance mechanisms for agreeing changes in
authorization and software layer.

Conventional databases are either controlled by single institution or have an institutionalized

corporate governance framework with members or owners voting on governance decisions.
Changes in authorization or software can be slow and expensive.18

Cryptocurrency blockchains are the extreme opposite case with near complete decentralized
governance. They are permissionless. Any network participant can recode the open-source
software and propose this replaces the existing software; but this proposal is only adopted if
there is majority agreement to the change across the network. 19

Any business or public administration application of distributed ledgers requires interfaces for
data import or export. This in turn requires identifying real world identities of users:

• When data is imported real world identities are required for data validation.
• When data is exported real world identities are needed for further data processing.

i.e. they have to be permissioned, with access to the data subject to establishing the real world
identity of users and access limited as necessary to a restricted set of eligible participants.
Institutionalized corporate governance is then also required to control this access.

16
Allowing them to avoid the slow and costly ‘proof of work’ consensus mechanisms used in unpermissioned
ledgers, for example Bitcoin mining. See Section 3 below for further discussion.
17
It would have for example been very much more difficult for Bernie Madoff to have continued as long as he did
with his investment fraud had investments in New York markets been recorded on a distributed ledger.
18
SWIFT is an example of such co-operative governance, with an institutional process to make key databases and
communication protocols that support international payments.
19
The software itself defines the determination of the majority, in the case of Bitcoin it is 75% of recent mining
power must agree to the adoption.

10
3 Applications of distributed ledgers in financial services

3.1 Fourteen areas of application

We now examine some of the opportunities for potential distributed ledger application in
financial services, as listed in Table 2. 20
Table 2: potential financial services applications of distributed ledgers
Application area Summary Assessment
A Asset ownership and management
1. Equity ownership and Some limited DL opportunities
transactions
2. Bond ownership and Some limited DL opportunities
transfers
3. Illiquid assets: syndicated More substantial opportunity for DL in both ownership
loans and asset backed and transactions
securities
4. Funds allocation by asset Complex operations: DL may help.
managers
B Trading and derivatives
5. Derivative exposures and Helping overcome complexity through data sharing, DL
clearing useful but multiple operators not required.
6. Collateral and default Promising initiatives, potential application of DL, but
management multiple operators not required.
7. Money and forex markets Limited application of DL to foreign exchange post
trade processing.
8. Metals and commodity Similar picture as in many other areas: limited niche
markets and trading application.
C Corporate financial services
9. Trade finance Many initiatives, strong case for data sharing using DL,
but unclear any will achieve critical mass.
10. Corporate supply chains Opportunities for digitisation, sharing of data using DL
can be important but multiple operators not required.
11. Insurance and reinsurance Many opportunities for digitisation, few require data
sharing using DL.
12. International payments Shared ledgers including DL are facilitating information
flow, unclear if multiple operators are required.
D Regulatory oversight
13. Client on-boarding & A critical area but main issue is agreed standardized
KYC/AML identity solutions, could then be supported using DL.
14. Regulatory reporting Main concern is standardisation to support automated
reporting and to allow supervisors direct view of
underlying data; some limited potential for DL.

20
We have chosen not to cover personal financial services, e.g. payday lending. While a number of start-ups propose
using distributed ledger for personal financial services, none seem to us to have yet developed credible applications.

11
This table serves as both a table of contents and summary assessment for the analysis
presented in the rest of this section. To make this a more manageable exercise, we divide these
opportunities into four broad areas of applications. For each of these four areas of application
we remark about the more specific opportunities. Our discussion here focuses on specific
adoption in particular areas not radical change in financial architecture – but we will mention
radical change where relevant.21

Each of these areas of possible application of distributed ledgers are specialisms to which skilled
professionals have devoted entire working careers. As independent researchers, we make no
claim to match the levels of knowledge and understanding of those working day-to-day in these
business activities. What we offer are initial assessments that taken together a can be a guide
to the most promising DL opportunities in financial services.

A: Asset ownership and management 22

Application of distributed ledgers in conventional financial services usually means replacing
existing arrangements not starting from scratch. Could adoption of distributed ledgers yield
sufficient benefits to justify the costs of migration to a new system? Even if this is justified for
the industry as a whole, will individual firms have incentives to make this move when they are
unsure about adoption by others? To address these questions, we discuss first distributed
ledgers for recording equity holdings and transactions. We then move on to examine their
potential use for recording holdings and transactions in bonds, syndicated loans and asset-
backed securities, and in fund management.

1. Equity holdings and transactions

We are aware of no commercial scale initiatives to facilitate equity transactions through holding
of security investment accounts directly on a distributed ledger rather than as at present
maintaining accounts with custodian banks who in turn hold securities in omnibus accounts
with a central securities depository.

This possibility received a lot of attention three years ago, when interest first arose in the
application of distributed ledger technologies to securities settlement. 23 Yet only one initiative
– the ASX replacement of its Chess settlement system, one of the seven case studies that we
explore further in Section 3 – is re-engineering core systems for recording securities ownership.
As we describe more fully in this case study, this is an application of distributed ledger
technologies but not (in our definition) a distributed ledger. The core replacement for CHESS is
still a centrally operated database. It will change how cash equities are transferred and serviced
by market participants (brokers, custodian banks), replacing inflexible COBOL based system
with one with fully integrated cryptographic security and full compliance with ISO20022
standards that support interoperability of transaction systems.

21
The possibilities of radical change are more fully addressed in Section 6 on public policy.
22
There is an overlap of issues in between this subsection “A. asset ownership and management” and the following
subsection “B. trading and derivatives”. Our emphasis in this sub-section is the potential impact of adopting
distributed ledgers on the long-term holders and issuers of securities and other financial assets. Our emphasis in
the next subsection is on market participants taking relatively short-term positions – in brokerage, dealing in OTC
markets, cash management, proprietary trading or hedging financial risks.
23
See (Mainelli and Milne 2016) (Mainelli and Milne 2016) discuss the use of the R3 Corda platform for sharing trade
and pre-settlement data on a bilateral basis, to reduce operational cost and risk between brokers acting on the two
sides of the trade. This limited application of distributed ledger technologies was not really distributed ledger since
it was bilateral not multiple users and did not involve maintaining permanent records.

12
The Chess replacement is will support an important element of distributed ledger technologies,
allowing the use of smart contracts to automate the business processes of market participants.
If they wish they can use the shared ledger services offered by ASX to ensure that clients and
counterparties have access to the same data as they do eliminating the need for manual
reconciliations. But it is not introducing a ledger updated by multiple operators or supplanting
the role of custodians in maintaining records of security holdings on behalf of clients.

There has been some exploration of the use of distributed ledgers in corporate governance
through employing distributed ledgers to support the exercise of proxy votes at corporate
annual meetings (something that is presently requires a complicated process of communication
through the various layers of intermediation). A leading example is the use distributed ledger
technologies supporting proxy voting solutions for mutual funds and ETFs offered by
Broadridge.24 This is not though a distributed ledger according to our Definition 1: it is (as with
many other practical applications labelled as blockchain or distributed ledger) a conventional
database with a single operator, but one adopting elements of distributed ledger technology,
in this case immutable cryptographically secured record keeping to ensure that there can be no
dispute about the outcome of votes, along with other digital technologies to inform fund
participants about corporate decisions. There have been other pilots using forms of distributed
ledger technologies to support proxy voting, for example conducted by SWIFT working with the
Singapore Stock Exchange and several Singapore banks. 25

This lack of adoption of distributed ledger in securities settlement may seem surprising, given
that one of the most widely circulated reasons for anticipating a ‘distributed ledger revolution’
in financial services has been the prospect of reducing the current two-day delay in securities
settlement to near-real time. This expectation was though always greatly exaggerated: the
reason for delay in securities settlement is far from being just the inefficiency of legacy systems.
It is largely a reflection of a preference for market participants for delayed settlement.26

The barriers to real time settlement of securities trades are not technological. Current
settlement systems, such as those operated by DTCC , Euroclear and the T2-Seurities operated
by the European Central Bank, can execute DVP settlement (the delivery of the security against
payment finalising the transfer of ownership) in near real time without using any form of
distributed ledger technology. Delay arises because of the need to check that the two sides of
trade are ready to settle before DVP: that the seller or their agent has control of the security in
a custodian account and is ready to deliver; and that the buyer or their agent has cash in a
transactions account ready to pay. The reason that current systems do not support real time
settlement that that many participants in securities markets do not have and do not want to
have the security or the cash ready to settle the transaction at the time the trade is executed.

For buy side cash investors – whether investment funds operated by asset managers, or direct
investment by institutional investors or retail investors – investment securities are purchased
as investments and are held for weeks, months or years. The two-day delay from T to T+2 in

24
See (Collins, Kozakis, and Wisdom 2018; Broadridge 2019)
25
See (Ledger Insights 2019d), who also note similar projects in Japan, Estonia, Canada, Russia and Poland.
26
See (Mainelli and Milne 2016) for more detailed discussion. One reason for this exaggerated expectations may
have been a mistaken analogy between securities market settlement and execution of retail payments. There are
obvious customer benefits in terms of better cash flow management and certainty of payment from real time
crediting of retail payments to beneficiary accounts, achievable through co-ordinated technological development
and investment (for example ‘Faster Payments’ in the UK). As discussed on our text, there are no such obvious
equivalent benefits to securities markets participants from real time securities settlement.

13
acquiring the securities is immaterial to efficient portfolio management. Provided the eventual
settlement is ‘DVP’ and through established credit worthy investment institutions the financial
risks of the settlement not taking place is negligible. The probability of such an event is already
extremely small and, even if there is a default on a contract to buy or sell a security, the only
exposure is that of replacing the transaction a couple of days later, an exposure that is any case
typically protected through a guarantee from a central counterparty spreading the risk of loss
across many market participants.

Short term leveraged investors such as macro-orientated hedge funds have even more reason
to prefer settlement at T+2 : this provides time to manage their liquidity, to borrow securities
for settlement of a sale when maintaining a short position overnight; or to borrowing money
for settlement of a purchase when maintaining a long position overnight. 27 As long as they can
obtain liquidity in money markets (see below for our discussion of money markets and
collateral management) then they have little need for an accelerated timescale for receiving
the proceeds of trade from securities transactions. Forcing the pre-positioning of cash and
securities prior to trading in order to support immediate post trade settlement, would require
much greater pre-commitment of capital and liquidity, sufficient to finance the maximum
anticipated long and short positions taken during the trading day. 28

It can still be argued that market participants would benefit from greater flexibility in
settlement times, being able to choose a settlement time, short or long, that is suited to the
counterparties to particular transaction. Settlement timing is currently determined by time
zone and the need for both sides of a trade to position themselves for delivery against payment,
according to the overnight (T+1 to T+2) local batch processing cycles. As a result, both cash and
securities can be locked up in securities settlement for longer than many involved in securities
transactions would like. A combination of a shared ledger – to record global trades dues for
settlement – and automated matching identifying potential for early settlement before T+2
could conceivably do more than current netting arrangements to reduce settlement times.

But this is an immensely complicated co-ordination problem, made more even more complex
by the standard practice of netting of securities trades and then novation of resulting net
positions (involving hundreds of counterparties) to a single position against a central
counterparty. While a global system determining individual settlement times to better meets
the needs of these hundreds of counterparties. In our judgement the benefits are far too little
to justify the substantial costs of developing and adopting such a system on a market wide
basis.

This does not mean that distributed ledger has no role in securities settlement. It just means
that the use case is not settlement speed. An example of a use case is Utility Settlement Coin
developing a commercial implementation of distributed ledger, allowing investors in security
markets to hold cash funds for securities transactions directly on a distributed ledger rather
than indirectly with a commercial bank. This is another of our seven case studies.

27
Confusingly the terms short and long are of course not investment horizon, both short and long positions taken
with an investment horizon of at most a few days in order to make profit from perceived market mispricing
28
For a persuasive statement of this argument see (Monahan 2019), who argues (from review of clearing and
settlement in securities markets and bank payments going back to 1584 and examination of contemporary data)
that current arrangements are highly efficient: only $8,2bn of committed reserve collateral, through netting and
CCP clearing, supports some $326bn of daily gross trades in US security markets. If this were replaced by real time
pre-funded DLT settlement, ruling out both multilateral netting and CCP guarantees, would require substantially
increased upfront commitment of cash and collateral to preposition for trades that may or may not take place)

14
This project should offer substantial benefits to asset managers and other investors – they no
longer have to rely on their commercial bank for the settlement of large value payment
transfers and getting ‘sucked into’ additional potential delays because the commercial bank
needs to delay a payment for their own reserve management purposes (awaiting an incoming
payment or intraday liquidity from the central bank). Utility settlement coin effectively pre-
positions them with the holding of central bank money required for final settlement and
guarantees the cash leg of the trade. This together with accompanying simplifications of the
operational steps involved in settlement reduces the costs and risk of settlement delay.

2. Bond holdings and bond transactions

Our discussion of the use of distributed ledgers for recording bond holdings and transactions
can be relatively brief, since the issues involved are very similar to those for equity investment.
Current arrangements holding and transacting in bonds parallel those for equities, holding
bonds in security accounts held with custodian banks, and work reasonably well. The cash leg
for settling a bond transaction can employ a distributed ledger solution such as utility
settlement coin just as easily an equity transaction.

There are operational differences between bond and equity markets. For government bonds
settlement is typically T+1 not T+2. In the past bonds, in contrast to the exchange trading of
equities, were traded in dealer markets offering telephone (voice) quotes. As with equities,
much bond trading is now electronic, but through a wide variety of single dealer and multiple
dealer platforms. 29 These platforms in turn link trade execution to post-trade settlement. Had
distributed ledger technologies first emerged in the early 1990s, when the shift from voice to
electronic execution of bond trades began, then it is quite possible that these new platforms
would have been leading adopters of distributed ledgers. They then though established custody
and settlement processes very similar to those used in equity markets. Application of
distributed ledgers in bond holding and bond transactions requires (just as in equities) the
replacement of existing systems that already work reasonably well.

We should mention one promising exploratory transaction, the Aug 2018 issue by the World
Bank, working with the Commonwealth Bank of Australia CBA, of a two year bond on an
Ethereum based distributed ledger.30 This was a live deal, not just a proof of concept, with the
investors (a range of Australian institutions) using the platform to participate directly without
the support of an issuing syndicate.

While successful, it is unclear if there is appetite for replication of this transaction, moving the
investment as it does outside of the usual framework of operational support provided by
custodian banks. The experiment was limited: cash payments for purchase, coupons and
redemption were not handled on the distributed ledger, all the ledger does is issue automated
instructions for cash payment to the lead arranger CBA. It does though reveal some potential
for employing distributed ledger in primary issuance. The principal benefit seems to have been
automation of the book building process for CBA with real time changes in investor submissions
and greater transparency for investors of their own commitments to the deal.

29
A review of these changes is provided by (BIS 2016).
30
Described in (Lee 2018).

15
 3. Illiquid assets: syndicated loans and asset backed securities
With the limited private benefits and substantial barriers to adoption of distributed ledgers for
holding and transacting in equities and bonds, it is unsurprising that the interest in employing
distributed ledgers for recording ownership of and transactions in financial assets has shifted.
Now most attention is paid to using DL for those financial assets where the institutional
arrangements for ownership and trade are relatively undeveloped or fragmented, for example
the possibility of using distributed ledgers to record participation in syndicated loans or
ownership of structured products.

A prominent example is the development of ‘Fusion LenderComm’, a collaboration between

Finastra, who operate the leading loan servicing platform Fusion LoanIQ, and the R3 consortium
using their open source Corda implementation of distributed ledger technology to allow
syndicated loan investors to access information on loan.31 As described by Finastra, the key
advantage of Fusion LenderComm is allowing the loan agent (the arranger or lead lender i.e.
the bank that co-ordinates the loan syndication and often also oversees subsequent loan
servicing) to fully control who has access to information on the borrower and the loan; and also
ensure that all this information is held in a standardized and easily accessible form.
Subsequently it is intended that the same platform will be developed to support the execution
and subsequent settlement of loan transactions.

Fusion LendingComm does not however seem to rely in any essential way on using a distributed
ledger (under our definition, a database with multiple users and multiple operators). Such data
sharing could as easily be supported by a traditional centralized database. This is illustrated by
a competing initiative to address fragmentation and inefficient communication of information
on syndicated loans by IHS Markit, describes itself only as an “information portal” and makes
no reference at all to blockchain or distributed ledgers. 32 IHS Markit are investigating the use
of distributed ledgers for transactions in syndicated loan, but their initiative – rather like the
Utility Settlement Coin project – seems to be focused on co-ordinating the cash leg of loan
syndication. 33

Another potential application of distributed ledgers is to record the component assets and
payment obligations in asset backed securitizations – including mortgage backed securities
(MBS), other securities backed with household loans (ABS), collateralized loan obligations used
to securitize syndicate loans (CLOs) and collateralized bond obligations (CBOs). A major concern
during the global financial crisis was the lack of transparency about payment obligations,
especially modelling the ‘waterfalls’ created by tranched structures and hence the implications
of loan default on payments to different tranches of a securitization. There are clear benefits

31
See (R3 Finastra 2018)
32
This initiative, announced in October 2018, is described by (IHS Markit 2018) as follows: “Specifically, the portal
provides:– Position reconciliation data: 10 agent banks submit data on 9,000 loan facilities to the service each day
and 200 different institutions, representing nearly 8,000 funds, use IHS Markit to electronically reconcile loan
positions; – Asset servicing data: IHS Markit is the leading aggregator of agent notices in the syndicated loan market.
In 2017, the firm transmitted more than 13 million notices from a broad range of agent bank systems to nearly 8,000
lender funds; – Loan reference data: IHS Markit actively maintains 150 reference data fields on more than 8,000
loan facilities, covering terms and conditions, covenants, amortization schedules, multiple types of identifiers and
other data loan managers use for market surveillance, valuation, credit analysis and performance attribution.
Corporate actions, amendments and restructures are tracked and processed intraday to provide customers with the
most accurate data possible.”
33
Described by (Allison 2018) who quotes John Olesky head of product management at IHS Markit “…the smart
contracts decide when a trade is ready to close and perform the cash settlement”.

16
to investors to having a shared database where they can track the allocation of past cash flows
and use for prediction of future cash flows to tranche holders.34 There has yet been only limited
effort to develop distributed ledgers that provide such transparency, one effort of this kind is
by the start-up Global Data Registry.35

There does not yet though seem to be large scale take up by the industry. There are several
reasons for this. One of the benefits of greater transparency only arise in a financial crisis and
so the private commercial return to such investment I such a platform is not so attractive.
Another is simply the difficulty of co-ordinating change involving a wide range of market
participants with no central authority to coordinate or market infrastructure to ensure all are
working to a common plan.

4. Investment and funds management.

Some of the most complex operational processes in global capital markets take place in funds
management. It is usual – in order to reduce transaction costs and take advantage of netting of
offsetting trades – to aggregate trade orders from several individual funds for execution, in turn
requiring re-allocation of the cash or securities obtained from the trade amongst individual
funds after settlement. At the same time funds and the brokers who execute their orders
operate complex execution systems (supporting algorithmic i.e. computer managed trade
execution supporting a range of different forms of order) and are subject to detailed and
complex regulatory compliance, in order to demonstrate best execution and fair allocation of
proceeds amongst different funds. New regulation, for example the EU Markets and Financial
Instruments Directive MIFID II are requiring increasing transparency of costs for final investors.

The complexity and operational costs of these processes and the increasing pressure from
regulatory requirements make them ripe for simplification and standardization of operational
processes. There is though relatively little discussion of the application of distributed ledger in
asset management, compared to its use in capital markets, commercial banking or insurance.
The most detailed discussion we have found is that of (Hunt and Mills 2018) who have
conducted extensive industry interviews focusing on the role that distributed ledgers might
play in reducing costs and providing investors with much better value for money. While as they
note, to date development of distributed ledgers is a relatively low expenditure priority in
stretched asset manager IT budgets, there are major opportunities including: 36

• Delivery of paid for services, such as research reports or peer to peer service inputs
such as ‘crowd validation’.
• Simplification of the duplication of asset registers held across Asset Managers,
Registrars, Custodians, Depositaries and Administrators, based on timely delivery of
position data were delivered in a distributed fashion from a shared transaction ledger.
Also reduced time and money spent on data reconciliations between asset registers.
• Automation of manual and paper-based processes, especially the use of smart
contracts to support the automation of manually-intensive processing of complex
assets such as exotic derivatives and structured investment products.

34
(Sindle et al. 2017).
35
See https://gdr.co/ , their product is described in (Groenfeldt 2018)
36
They also identify other potential benefits that apply across financial services such as a distributed identity
service to reduce costs of client on boarding; application to liquidity and collateral management; and direct
reporting access for regulators and clients using underlying granular data, all discussed elsewhere in our report

17
 • A transition to real-time immediate settlement with reduced reliance on central
infrastructures and direct access to central bank money; something that could be
especially valuable in repo/ securities financing.

Some asset managers also perceive opportunities for the adoption of distributed ledgers
supporting more fundamental change, for example “peer to peer” distribution where retail
investors hold assets directly and with current retail platforms and distributors and asset
managers playing only an advisory and operational role; also in supporting the automation of
corporate actions such as proxy voting and class actions. These are certainly possibilities.

Perhaps most importantly, (Hunt and Mills 2018) locate the adoption of distributed ledger
within the context of a bigger picture of digitisation and change in systems architecture:

The Asset Management business is positioning for a move towards a service-based

approach, within which market data, reference data, entity data, transaction data and
position data will be maintained and delivered by central services. Applications will
consume, rather than maintain that data, and will cease to be islands of self-contained
data: they will be leaner and fitter as a result…. The architectural objective is becoming
clear, but it is not at all clear yet how we get there: establishing the critical mass required
for genuine wide-scale services and utilities has always been challenging….Distributed
Ledger Technology is seen by Asset Managers as potentially very beneficial in this
context, not because it is the only solution / technology in the space, but because it can
facilitate and accelerate the establishment of the key services, and help us to navigate
our way towards service-based architectures. (Hunt and Mills 2018 pg 20)

One of our case studies, that of the IZNES distributed ledger, illustrates some of the
opportunities that arise from applying DL in this area. This can be especially useful in providing
final investors with reliable and consistent information about underlying costs of custody and
investment transactions. We believe though that DL alone is part of the answer to these
challenges, there is still a long way to go with standardization of many aspects of operational
process across the funds management industry.

B Trading and derivatives

We now turn to our second broad area of application of distributed ledgers in financial
services.

5. Derivative exposures and clearing

A major challenge for derivative traders and brokers is the complexity of the instruments,
especially for OTC products are tailored for the requirements of each individual client, unlike
the standardized derivatives contracts traded on exchange.

A further case study we examine later in this section is the work of Digital Asset with ISDA the
International Swaps and Derivatives Association to develop standard cross-industry processes
for the execution of derivative contracts. Here we discuss this initiative in the broader context
of the ongoing work of ISDA, supporting the standardization and the efficient trading and
settlement of OTC derivative contracts. This has been a central ISDA responsibility since the
emergence of OTC derivative markets in the 1970s. ISDA master agreements and protocols
provide a well understood legal contracting environment. ISDA has also been centrally involved
in the automation of OTC derivatives market since 1999, in its role as manager of the XML
18
business information exchange language FpML used for electronic communication in
derivatives trading.

ISDA’s work on automation seems consistent to us with the view that distributed ledgers are
not themselves revolutionary; what is revolutionary is digitisation including support through
sharing of and independent processing of data using appropriate distributed ledger
technologies. With several parties involved in processing of a derivatives contract, both clients
and dealers, the coordination of operational processes requires an appropriately structured
environment for shared processing with standardized machine executable concepts fully
describing each possible processing event.

Over the past three years ISDA have focused on a major technology project the ‘Common
Domain Model’ or CDM, supported by Digital Asset, which in March 2019 was released in an
open source version for commercial application to interest rate and credit derivatives: “CDM for
the first time creates a common blueprint for events that occur throughout the derivatives
lifecycle, paving the way for greater automation and efficiency at scale.” 37 This overcomes
limitations in existing communication standards (FIX-XML, FpML as well as some older SWIFT
messaging standards) which still accommodate considerable variation of implementation across
institutions. Fully automated shared processing requires a deeper level of standardization.

The CDM has been inspired by the opportunities presented by distributed ledger technologies.
As discussed in their 2017 design definition document, the core concept is that modern
transaction and post-trade processing must involve multiple parties (dealers, clients, banks,
central counterparties, interdealer brokers) and that as a result the automation of derivatives
processing benefits from two key elements of distributed ledger technologies: Multiple,
identical, copies of a computer‐readable database; and complete time‐ordered immutable
records containing the entire data history. 38 This can then support the application of smart
contracts. ISDA has collaborated with Digital Asset employing their smart contract language
DAML to bring offer automated open source business processing solutions as part of the CDM
initiative.

One focus in developing CDM has been in ensuring that automatically executed operations
(‘smart contracts’) are both legally and operationally valid and implantable using their CDM. ISDA
has released two white papers on this. 39 As described in our case study, ISDA has been
cooperating with Digital Asset on using Digital Asset’s smart contract coding language DAML to
provide an open source reference code library to facilitate application using the ISDA CDM. 40 The
leading systems solution provider in collateral management Baton Systems has also announced
that it’s its platform now natively supports ISDA’s Common Domain Model (CDM) for
derivatives.41

CDM though not specific to any distributed ledger solution or even to the adoption of a
distributed ledger for data sharing. As the documentation in the Rosetta Technology release of
CDM 2.0 explains:

37
From (ISDA 2019a)
38
See (ISDA 2017) – we will not discuss the formal technical definitions they provide of ‘lineage’ and ‘consistency’;
we simply note that these closely correspond to these two of our core functionalities.
39
These are (ISDA/ Linklaters 2017; ISDA/ KWM 2018)
40
Announced in (Digital Asset/ ISDA 2019; Ledger Insights 2019a)
41
See (Ledger Insights 2018a)

19
“The ISDA Common Domain Model is an initiative that ISDA has spearheaded to produce a
common, robust, digital blueprint for how derivatives are traded and managed across their
lifecycle…. ISDA anticipates that establishing such digital data and processing standards will
lead to the following benefits:
• Reduce the current need for continual reconciliations to address mismatches caused by
variations in how each firm records trade lifecycle events;
• Enable consistency in regulatory compliance and reporting;
• Accelerate greater automation and efficiency in the derivatives market;
• Provide a common foundation for new technologies like distributed ledger, cloud and
smart contracts to facilitate data consistency;
• Facilitate interoperability across firms and platforms.” (Rosetta Technology 2019)

6. Money and foreign exchange markets

There are two reasons for anticipating strong interest in the opportunities for employing
distributed ledgers in improving the efficiency of transactions in money and foreign exchange
markets.

• Market participants often need to be able to complete transactions immediately (in

contrast to securities markets, where as we have seen T+2 settlement is more of a
desired feature than a bug).

• The money and foreign exchange markets were at the centre of the conduct problems
that emerged since the global financial crisis – the manipulation of both the LIBOR index
and the 4pm Foreign Exchange fix and also broader concerns about front-running and
other examples of exploitation of clients. 42 If distributed ledger can serve as a means of
improving transparency and trust, then nowhere is this more relevant than in the money
and foreign exchange markets.

Given this, surprising that little attention seems has been paid to the development of
distributed ledger applications in money and foreign exchange markets. This is perhaps because
same day settlement is already available for money market transactions, for example DTCC’s
Money Market Instrument Transaction Process service that supports end-of-day settlement for
fourteen US money market instruments.43 Also the benefits of greater transparency through
digitisation in controlling conduct risk are primarily social and not private, so limiting incentives
for market participants to adopt distributed ledger in support of transparency of trade
execution.

We have identified few initiatives for applying distributed ledger in money and foreign
exchange markets.44 Most work has been on employing distributed ledger for the settlement
of foreign exchange. A leading initiative is that of CLS-net, a service built by CLS with IBM using

42
See (BoE / FCA/ HMT 2015; Myles 2015; Carney 2017)
43
This is described in (DTCC 2013)
44
We do not cover efforts at developing decentralized exchanges where cryptocurrencies or crypto assets can be
traded without revaluation of identity, some discussion is provided by (Lin 2019). In Section 5 on public policy we
discuss the use of distributed ledger to address conduct risks.

20
the Hyperledger Fabric. 45 CLS is the settlement service for the $5 trillion a day global foreign
exchange market. It provides settlement at T+2 for the 18 principal internationally traded
currencies from its core service ‘CLS-Settlement’. 46 CLS-net went live in late 2018. It provides a
complementary service, supporting settlement in 120 currencies i.e. those not covered by CLS-
Settlement. It is a multi-user ledger in which the two parties to a foreign exchange transaction
both submit their trade in order to coordinate settlement, but to our understanding CLS-net
has only a single operator CLS. It is yet another example of a financial services application of
distributed ledger technologies that is not a distributed ledger.

A complementary project that appears to be gaining some traction is Cobalt, a start-up that
focuses on post-trade technology in the institutional foreign exchange market. Their core
product is Cobalt Blue Sky, a shared (not distributed) ledger to which foreign exchange market
participants can post trades, providing an agreed ‘golden copy’ for automation of post-trade
services, including settlement via CLS and credit and credit risk management (just as in
securities markets foreign exchange traders prefer T+2 settlement in order to have time to
arrange the necessary funding to settle their trades). 47

The only other money and foreign exchange projects we have found are for conducting repo
transactions on a distributed ledger. As this is related to collateral management, we discuss this
in the following subsection.

7. Liquidity and collateral management

Collateral and default management is perhaps the most complex of capital market business
processes. The issue here is providing systems for prediction and management of short-term
requirements for acquiring cash and securities. We cover three things in this subsection. First,
we provide an overview of collateral management. Next, we consider the relationship of
collateral management to default management and systemic risk. Finally, we examine some of
the proposals that have been made about applying distributed ledger to obtain efficiency gains
in collateral and default management. We identify some solutions applying distributed ledger
technologies to support cash liquidity and collateral management, but once again these turn
out to be relatively conventional solutions that employ some elements of distributed ledger
technologies, not a revolutionary shift to a new approach to record keeping and transfer of
ownership with multiple operators updating a distributed ledger.

The collateral management functions: speedy response to margin calls; optimizing collateral
A major current challenge for all institutions taking trading positions in security and derivative
markets is collateral management.48 Collateral is required for capital market trading in two
circumstances –

45
For description see (Morris 2018b, 2018c; CLS 2018)
46
As described in (Lindley 2008) CLS-settlements effectively eliminates settlement risk, through its key features:
daily netting of settlement, so all payment due are on a net basis against the CLS bank; ‘PVP’ (payment versus
payment) so that payments are received only when paid; and with a liquidity facility (not a guarantee) so that if
there is settlement failure the counterparty still receives and pays funds as anticipated until the situation is
resolved (this is not a central counterparty guarantee but sufficient to protect from the impact of all but the most
extreme possible default risks).CLS is owned by an industry consortium and was originally established in 2002 as
the Continuous Linked Settlement Bank.
47
See (Cobalt 2019; Ledger Insights 2019c). They also provide an integrated information management tool Cobalt
Blue Sky and a credit management tool Cobalt Credit.
48
Much of the following is based on the insightful summary provided by (Murphy 2014).

21
 • financing of a securities trade. A long securities position requires posting the securities
as collateral to obtain leveraged financing. Similarly, a short position also requires
financing, in this case the borrowing of securities through repo or securities lending
matched by the posting of cash collateral.
• limiting the counterparty risk of derivative contracts, almost all of which now require
margining either to a central counterparty or on a bilateral basis.

In either case the initial posting of collateral can be followed by calls for further collateral either
calls for ‘variation margin’ as the market price of contracts changes; or calls for additional ‘initial
margin’ in times of market stress with heightened market price volatility and falling collateral
values.

The collateral management function therefore has two main responsibilities:

1. Ensuring that collateral is always posted promptly as required, both as part of the
conduct of securities and derivative trades and in response to margin calls.
2. ‘Optimizing’ the use of collateral, making sure that the institution holds sufficient
uncommitted or unencumbered collateral (cash or good quality securities) so that
collateral needs are always met but not more than necessary since these are relatively
low return assets.

Counterparty default and systemic risk

A related concern is assessing the firm’s ability to manage the default of a major counterparty
– the situation where collateral provides protection – or negotiating a period of extreme market
stress, when demands for posting collateral rise substantially. The collateral management
system should provide risk management with the information needed to assess and prepare
for risks of counterparty default and coping with systemic crisis.

We mention a number legal and contractual details that go beyond the management of
collateral. In Section 5 below we discuss related issues of public policy and how distributed
ledger technologies might be used by the regulatory authorities to reduce the risks of systemic
financial crisis.

First there are two distinct legal mechanisms used for ‘posting’ collateral: the first is title
transfer, the asset is sold and then sold back (an example is the transfer of security ownership
in a sales and repurchase transaction or repo); the second is the transfer of a security interest,
in which title can be claimed in the event that the counterparty fails to perform their
contractual obligations, an example is a mortgage. A major difference between these two cases
is that with transfer of ownership the asset is ‘unencumbered’ it can be freely sold or used again
as collateral (so called ‘rehypothecation’).

Sometimes the collateral is held by a third party (e.g. the ‘tri-party’ repo used in the New York
markets) which prevents re-use but this can instead cause problems around matching the
timing of return of borrowed funds/ securities and their matching collateral. In the event of
default, it may not be possible to close out a long securities position where title has transferred
because the collateral is trapped.

A short securities or bilaterally margined derivatives position is less of a problem because these
can still be closed out and the worst possible outcome is a smaller cash claim on the defaulted
22
counterparty. A centrally cleared position is least likely to be a problem since it is guaranteed
by the central counterparty with risks of loss shared amongst market participants (but it is
conceivable that the central counterparty could itself default and calls by the central party for
increased initial margin during periods of market stress can be a concern).

Employing distributed ledger technologies in collateral management

This seems to be an area with much discussion but relatively few applications that are
adequately addressing the business issues. There are many claims that ‘smart contracts’ will
help collateral management, but not all seem to have a proper appreciation of the business
requirements for putting this into practice.49

Three prominent initiatives are exploiting the potential for distributed ledger technologies for
the automation of collateral management and the borrowing of cash and securities. DTCC
working with Digital Asset successfully completed the proof of concept applying digital ledger
technologies to improve the netting efficiency of the start-leg of repurchase agreements. 50 This
project aimed to promote greater use of their central clearing services for repo contracts (Fixed
Income Clearing Corporation FICC) which already nets and settles the repayment or ‘close leg’
in the $1.7tillion a day of repo contracts for US money markets.51 The purpose of the project
was to introduce similar netting into the initial start leg of the repo contracting, thus further
reducing collateral requirements in these money market transactions.

While the initial POC was favourable, further exploration of this project led DTCC to decide that
the project was not worth bringing forward to commercial scale. One reason, we understand,
is that the required data was already available on internal conventional DTCC databases. Thus
increased start leg netting did not require the integration of DTCC systems with the systems of
external users that would have justified pursuing a distributed ledger implementation:

"DTCC believes the value of DLT is derived from the synchronization of business processes, which
eliminates redundant and siloed activities and results in a lower total cost. After consultation
with banks and other financial institutions, DTCC found that the desired scope and business
objectives of the start-leg repo project could be achieved using traditional technologies. The
repo project produced valuable insights and led us to explore additional use cases for DLT."52

A second practically relevant digital technology solution in collateral management is the Asset
Baton data management system provided by Baton Systems to Citigroup, a real time
information and payments executions system used to monitor collateral positions and simplify
the initiation of required cash payments in multiple currencies. 53 Baton are specialists in
providing middleware software that integrates legacy payment systems. This again appears

49
We have found a number discussions of distributed ledger based solutions for collateral management e.g.
(Halbertsa 2017; DreamzTech Solutions 2018; Bloemer and Sekar 2018; Storm 2018), but regrettably almost none
explain how distributed ledger technologies might support collateral management with any clarity and some
exhibit substantial misunderstanding of how collateral management is conducted. A common claim is that smart
contracts can automate collateral management but this is clearly an oversimplification: for example an automated
immediate response to margin calls would require firms to hold increased levels of unused collateral rather than
optimum levels with occasional delays in margin payment while sourcing additional cash or securities.
50
This POC is described in (DTCC 2017a)
51
http://www.dtcc.com/clearing-services/ficc-gov/repo
52
Reported in (Cullinan 2018)
53
Adopted by Citigroup working with CME clearing, see (McDowell 2017; Baton Systems 2019).

23
not to be a distributed ledger, according to our Definition 1, because it has only one user/
operator (although Baton describe it as a distributed ledger). This is simply a database internal
to Citigroup that employs distributed ledger technologies to bring together collateral positions
and margin requests from a variety of Citigroup legacy systems, supporting rapid and largely
automated response.

A third collateral management solution based on distributed ledger is that for bilateral repo
offered by Broadridge, in partnership with Digital Asset and utilising their open source DAML
smart contract language. 54 Broadridge focus on “building permissioned network solutions
using Enterprise DLT Platforms” (and are also well known for their proxy voting solutions for
mutual funds, described above). Broadridge value DAML in this context because it has been “…
specifically designed to model and execute multi-party workflows”. Their solution is designed
to provide end to end functionality throughout the life of the repo-contract, in which delivery
of collateral and collateral management is one aspect, after contract agreement and
confirmation. The benefit of a shared cryptographically secured database is providing a single
version of data on which different repo transaction participants can draw – hence eliminating
the need for manual reconciliation and contract disputes Once again, while described as a
distributed ledger, it appears to have a single operator so not distributed ledger on our
Definition 1.

Overall, what these examples show is the growing importance role of the application of various
distributed ledger technologies as part of the ongoing digitisation of collateral management
processes. The various component of distributed ledger technologies, immutable shared
records, smart contracts are valuable both in accessing consistent data from a variety of
external and internal systems on risk exposure and collateral requirements, for anticipating
potential calls to provide collateral, and for prompt execution of the transfer of both cash and
securities collateral when required. Distributed ledgers themselves though are less obviously
relevant, it seems to be much more cost effective to build these tools on existing conventional
systems and databases than start from scratch with a revolutionary new approach.

We will return to collateral and default management in our discussion of public policy provided
in Section 6, discussing the possibility of using distributed ledger to deal with the potential
trapping of collateral in a counterparty default and in management of central counterparty and
other collateral requirements in a systemic financial crisis. These are further potentially
valuable applications, but not commercially justifiable since they are a response to potential
systemic risk not enhancing the efficiency of collateral management processes inside firms.

8. Metals and commodity markets and trading

We can be brief here. The overall picture is similar to that for other applications of distributed
ledger in financial services documented elsewhere in this section.

Practitioners have explored several potential applications of distributed ledger in metals and
commodity markets, these exploratory projects falling into three main groups;
(i) settlement of trades in established metal and commodity markets

54
This discussion largely based on (Mayadas 2019; Sheshagiri 2019).

24
 (ii) trading of metals on crypto platforms through creating a token that represents the
underlying, applied mostly to precious metals; 55
(iii) applications in the supply chain for commodity production and distribution. 56

The overall picture is very close to that documented for other financial services elsewhere in
this section. Initial exploration between Euroclear and Paxos for using distributed ledger to
settle gold trades in the London Bullion market ground to a halt in 2017 and has not been since
followed up. 57 There is no obvious gain over existing settlement arrangements. The shift in
interest from volatility cryptocurrencies to stablecoins has stimulated projects to ‘tokenise’
precious metals for trading on crypto exchanges (but does not contradict our view that ‘crypto’
will merge with mainstream assets). There are some substantial efforts at applying distributed
ledger to provide transparency in the metals and commodities supply chain, but these are
challenging systems developments not easy wins. 58

C Corporate finance

9. Trade finance 59

Trade finance is the provision of credit and insurance in international trade. It is another
complex area, with many instruments involved. Investopedia lists some of the main
instruments used (i) lines of credit from banks to both importers and exporters (depending on
whether payment is made in advance or on delivery); (ii) Letters of credit in which the buyer's
bank guarantees payment to the seller for the goods shipped, once the terms in the LC are met
by the seller; (iii) factoring of account receivables, when companies are paid invoices upfront
before the buyer makes payment, on a discounted basis (iv) government supplied export credit
or working capital; (v) insurance of shipping and goods which can also (as an alternative to the
letter of credit) protect the exporter from non-payment by the buyer. Trade finance is also a
common target for fraud and in the front line of AML/KYC compliance, so the financial
institutions involved have to know exactly who they are dealing with.

Much of the complexity arises because financial arrangements are contingent, on satisfactory
delivery as well as regulatory compliance. Trade finance therefore involves multiple documents
and multiple parties. The operational process, still used for the overwhelming majority of
global trade, continues to be fragmented and with both paper-based operations and a
requirement for frequent manual interventions, for example response to emails. 60 It should

55
An example is the trading of a token representing a precious metal on Tradewind, the main difference from
conventional precious metals ETF funds is that the token is ownership of the underlying metal and can be
exchange for physical delivery not just for monetary repayment at the current market price (Barley 2018).
56
See discussion of Komgo under trade finance initiatives below. Another promising example is the cross industry
collaboration Forefield on traceability of metals backed by the London Metal Exchange (Ledger Insights 2019b)
57
See (Zhao 2017)
58
A similar assessment, with more detailed discussion and examples, is offered by (Belt and Kok 2018)
59
A recent independently written report (Ganne and Patel, 2019), providing more detailed analysis of the
application of DL in trade and trade finance, reaches very similar conclusions to us.
60
This is well described by (Ramachandran et al. 2018) “However, this facilitation mechanism remains complex,
with a large number of players (banks, corporates, shippers and other facilitators) exchanging numerous data
points across multiple locations and links in the value chain. A single transaction can involve approximately 5,000
data field interactions. Processes are still largely paper-based. An end-to-end process can include 10-20
documents with a total of more than 100 pages, but containing as few as 60-80 unique data fields. These are then
re-used and duplicated across documents at various stages in the process, leading to errors, discrepancies and

25
therefore offer considerable possibilities for digitisation through the sharing of data amongst
many users on a distributed ledger.

The prospect of addressing these trade finance inefficiencies using distributed ledger has
prompted the launch of several initiatives: 61

• R3 is supporting two major initiatives for using distributed ledger in trade finance,
employing its Corda platform. The first is HSBC’s VoltraOne platform, now being
developed to a commercial scale by CryptoBLK.(R3 CryptoBlk 2018) This focuses on the
digitisation of letters of credit. On 1 May, 2018 R3 and HSBC undertook the world’s first
blockchain-based trade finance deal. In the deal, HSBC issued a letter of credit for U.S.
food and agriculture firm Cargill using blockchain.

• The second Corda bases solution is the TIX platform of TradeIX and Marco Polo,
launched and providing a range of trade finance related solutions.(TradeIX 2019; Marco
Polo 2019) This is designed to improve transparency in the bank accounting systems
that track customer trade finance and through this help customers obtain receivables
finance.

• IBM has been supporting two initiatives. The first is we.trade based on the Hyperledger
Fabric. This is a collaboration of several European banks with an emphasis on providing
trade finance to SMEs who are unable to access traditional trade finance instruments
such as letters of credit. 62 The solution is very complete, providing a variety of internal
financing instruments and with automated links to initiative SWIFT payments

• Another IBM initiative involving five banks was Batavia, focusing on monitoring trade
flows and associated corporate financial obligations. Batavia has since merged into
we.trade with an apparent ambition to extend that initiative beyond the SME space.

• A fifth trade finance collaboration is HKTFP, the Hong Kong Trade Finance Platform,
established as a co-operation between seven Hong Kong banks in 2017 in an effort to
digitize all aspects of trade finance. 63 This is apparently working towards commercial
lunch in 2019.

• Another, specialized on commodity trade finance, is the Komgo platform, distinguished

by being a collaboration between banks and corporates, and incorporating secure
encrypted document exchange that supports KYC compliance. Komgo engage in proof
of concept in late 2017 early 2018 and a commercial launch is anticipated relatively
soon.

These initiatives are promising but should be assessed alongside the many efforts that have
been underway for some years to digitise trade finance. A leading example is the Finastra
Fusion Trade Innovation software, which is already used by around 200 banks to integrate their
customer channels and payments systems in supporting trade finance solutions.64

large amounts of wasted manual effort. As a result, a trade transaction can take up to 2-4 weeks, creating costly
bottlenecks in physical flows of goods. Fraud is another concern, with paper forgery and duplicate invoicing
common in many locations.”
61
A valuable review is provided by (CB Insights 2018)
62
A useful description is (H. Morris 2018)
63
See (KPMG 2018)
64
https://www.finastra.com/solutions/transaction-banking/trade-supply-chain-finance/fusion-trade-innovation

26
Last year the Boston Consulting Group, working with SWIFT, released a review of the ongoing
digitisation of trade finance, highlighting several technological opportunities, including: the use
of optical character recognition to read paper instruments; the development of mobile and
internet channels for customers; and fuller dematerialization and automation of operations
using data from ‘the Internet of Things’ (for example shipping data) and artificial intelligence/
robotic process automation to replace manual processing.(Ramachandran et al. 2018) They
further note that while some banks are now investing in digital ledger solutions for trade
finance, these are still a long way short of achieving the widespread adoption that will be
needed if they are to widely used by importers and exporters; and they also point out to the
fundamental legal obstacles to adoption of distributed ledgers solutions – a digital instrument
has to be legally valid in the both he importer and exporter’s jurisdictions.

There have also been to develop distributed ledger solutions for digitizing of global supply
chains, monitoring the physical movement of goods and the required accompanying processes
of checking compliance with trade agreements, safety and other product regulations, and the
assessment of tariffs. These global supply chains also have relied largely on paper-based
processing. The leading initiative of this kind is the IBM-Maersk TradeLens project.65 Maersk
is the global leader in international container shipping, so has a natural interest in this
digitisation. There are though reports that competing shipping services companies other than
Maersk have been reluctant to join TradeLens, because Maersk is seen as being too dominant
in the governance of the project, and a competing initiative Global Shipping Business Network
(GSBN) has been established by a group of Asian ports and shipping companies. 66

Overall, it seems that while there are a very large number of initiatives, there is also still a long
way to go. Addressing the gap in the provision of trade finance to SMEs seems to be more
about KYC regulation and credit information than data sharing. 67 Ultimately, to fully exploit the
opportunities for digitisation, there should be interoperability between the platforms for trade
supply chains and for trade finance. A ‘super platform’ that integrates all aspects of trade is
unlikely, and individual platforms may struggle to attain critical mass. It is not clear that any of
the many initiatives to share trade finance data – whether the platforms involved are digital
ledgers or centrally operated – will achieve critical mass on their own.

10. Corporate supply chain finance.

We offer a brief discussion of domestic corporate supply chain finance. The issues are similar
to those in trade finance. Most transactions are though within a single jurisdiction so simplifying
some legal and regulatory compliance and payment transactions.68

There are many initiatives seeking to develop distributed ledgers for supply chain finance, even
more than for international trade finance. Examples include AntFinancial’s launch of Ant Double
65
See (White 2018; Scott 2018; Tradelens 2019).
66
See (Tinianow 2018; Safety For Sea 2018). Reports that TradeLens has only attracted one shipping service
company other than Maersk also prompted some remarkably ill-informed chatter claiming that this demonstrates
that ‘permissioned ledgers’ do not work and only a truly open and truly decentralized unpermissioned ledger can
truly deliver trust e.g. (Broersma 2018). For the reasons we discuss above in Section 3, we think such views are
completely off target, the problem if there is one is in the governance layer and removing permissions will only
make that problem worse not better.
67
A recent BNY/ICC survey ranks better KYC as far more important than distributed ledger for bridging the trade
finance gap for smaller companies, though greater transparency could help (Ledger Insights 2019e)
68
Supply chain applications generate even more than the usual amount of blockchain absurdities. One can only
laugh at this one from Greensill: “You will no longer finance the delivery of an asset—be it physical or a service.
Technology will predict that you are going to receive an order for that asset, work out when you will deliver it and
when your customer will pay, and let you have the money upfront so you can finance the work.” (Greensill 2018)

27
Chain linking Alipay with supply chain to finance SMEs with large corporate customers; and by
TenCent again for SME finance working with the We.pay payments solution (no connection with
we.trade); Dianrong and FnComm aiming to serve 40 million SMEs in China, after a successful
proof of concept test of their distributed ledger product ‘Chained Finance’; an ambitious
proposal by Citrusexchange that is intended to bring access to finance to the world’s SMEs; a
project led by Mizuhuo Finance in Japan; The Digital Trade Chain Consortium involving eight
leading European banks including Deutsche and HSBC; IBM’s projects with Mahindra Finance
in India and with Union Bank in the Philippines; the XMBC project aiming to solve SME financing
problems in Russia.

The number of supply chain distributed ledgers at ‘proof of concept’ stage is even larger when
broadened to include all aspects of the supply chain. The website www.ledgerinsights.com lists
more than one hundred news items about distributed ledger initiatives for supply chains over
the past year alone, including in arms procurement, food chains and agribusiness, metal and
commodities, pharmaceuticals, the automotive industry, public procurement, and
construction.

The principal goals of these developments are:

• Improving supply chain visibility and traceability

• Driving operational efficiency, removing manual processing in both contracting and in
invoicing and payments

Tools are being built using distributed ledger software such as Corda, DAML and Hyperledger
and provided by major consultancies and vendors. 69 It is though far from clear that distributed
ledger with multiple operators is necessary to achieving either of these goals, compared to the
alternative of a ledger with a single operator or APIs and other software solutions to facilitate
communication between different systems.70

11. Insurance and reinsurance

Across the insurance industry there are substantial problems with fragmentation of data,
continued reliance on paper-based rather than fully digitized operational processes and the
common challenge of sharing incompatible data between multiple parties in the insurance value
chain (IBM, n.d.). The insurance industry has been seen as particularly appropriate for distributed
ledger adoption, because of the networks of participants involved in distribution (a policy
application can pass through the hands of several brokers), in claims processing (often
outsourced to a network of providers) and in reinsurance (requiring the sharing of underlying
contracts and claims data to support reinsurance treaties.)

The US insurance industry has shown particular interest in the use distributed ledger and other
technologies such as AI in insurance. One major initiative is RiskBlock – a consortium of more

69
Two examples: IBM offers a range of supply chain solutions built on Hyperledger Fabric (IBM 2019); Ernst and
Young has a commercial scale product EY OpsChain built on Ethereum (Brody 2017; EY 2019).
70
Some of the barriers to application of distributed ledger in the supply chain are identified by (Alicke et al. 2017),
who suggest that other simpler technologies can achieve most of the transparency and efficiency gains in supply
chains and by (Pisa 2018) who highlights complexity of decentralized solutions and the underlying challenge of
‘serialization’, obtaining a unique identifier for each asset in the supply chain in order for it to be digitally traced.

28
than thirty US insurance companies – and their Canopy 2 platform based on R3 Corda. 71 Canopy
2 is a modular suite of solutions covering both policy writing and claims management. The first
applications are for proof of insurance and initiation of claims. The driver though seems to be
obtaining efficiency by using common shared solutions, so multiple operators may not be
required.

Another initiative is the Blockchain Insurance Industry Initiative, B3i, founded by 15 re-insurers in
December 2016 and joined by another 23 companies including brokers in October 2017.
Its initial purpose was to explore the potential of blockchain to increase the efficiency of insurance
transactions. On March 23, 2018, B3i was incorporated in Zurich with a vision to create a re/insurance
ecosystem enabling members to develop innovative products and services, and increase the
relevance, accessibility and affordability of insurance for consumers. This ecosystem is intended
catalyse the generation of new business models offering growth, efficiency and quality, and
ultimately closing the protection gap. https://b3i.tech/home.html

Globally IBM is taking a leading role in applications of distributed ledger in insurance, involved in
most widely publicized applications. An example from their work of how distributed ledger may
help cope with these data challenges is the ‘open-IDL’ project, a co-operation between IBM and
the American Association of Insurance Services (AAIS) (Portier 2018; AAIS 2018). This is largely a
regulatory reporting initiative. It is a response to the particular US challenge that insurance
regulation is divided amongst the 50 states, not a federal level responsibility, and gives national
insurance commissioners wide ranging powers to control premiums on property and casualty
(P&C) insurance under the P&C Model Rating Law. OpenIDL (Insurance Data Ledger) is written in
the HyperLedger Fabric for open-source distributed ledgers. It allows insurers to report both
policy and claims data to insurance commissioners across the US in formats required by P&C
Model Rating Law under the guidelines of the National Association of Insurance Commissioners.
It also serves to automate the process of updating regulatory reporting data, with real-time
rather than batch data transfer and minimising manual intervention, with the permissioning to
review data that is provided state insurance commissioners reducing the need for time-
consuming data calls.

Open-IDL is a promising initiative, and is using the security and permissioning tools provided by
the HyperLedger Fabric, but is it a distributed ledger? Not really, because at least at present it is
not being used for sharing of data between insurance companies (which could be a breach of
anti-trust laws): “data remains private and protected from external parties and other openIDL
participants” or for supporting reinsurance transactions. Governance is not shared but remains
the responsibility of AAIS. It could have been set up as a conventional database. Nonetheless,
even if not distributed ledger, it could provide a foundation for future cross-sharing of data in US
P&C insurance.

Another IBM example is a co-operation between IBM, AIG and standard-chartered on the proof
of concept for employing distributed ledger to support multinational insurance contracts, where
the insured party requires a single insurance policy that covers their activities in multiple
jurisdictions (IBM 2018a). Again it is the need tailor to jurisdictional differences in regulation and
market practice that that is critical, in this case combining data from a master contract written
in the UK with three local policies in the US, Singapore and Kenya into a single real-time database,
tracking premiums and payments events and offering read permissions to other parties such as

71
Described by (Morris 2018)

29
brokers and auditors. Again though it is unclear that this had to be a distributed ledger rather
than a conventional database supported by cryptographic security.

A further IBM example is their work with ISN, “… the global leader in contractor and supplier
management. We support more than 590 Hiring Clients in capital-intensive industries to help
manage more than 70,000 contractors and suppliers with operations in over 80 countries.” 72 The
business problem faced by ISN is ensuring that the contractors and suppliers they provide have
valid indemnity insurance. IBM have worked with ISN and Marsh the global insurance broker to
provide a distributed ledger build on Hyperledger Fabric that provides digitally signed insurer
proof of contractor and supplier insurance cover at the time policies are agreed for all hiring
clients and also brokers and insurance underwriters on the ISN network (Derebail 2018). Once
again it is unclear that this is or needed to be a distributed ledger. There is no consensus
mechanism – simply a reliance on insurer’s validation of the policy. But the use of cryptography
with a properly permissioned data base avoids the possibility of contractor fraud and real time
automated updating is a major improvement over conventional manual processing.

Distributed ledger is often mentioned in the context of specialized insurance products with
multiple beneficiaries. An example is marine insurance, providing protection in to marine cargos
in international supply chains (Mavrias and Lin 2018). Automated payouts, triggered by data
from the ‘IoT’ (for example excessive temperature in a refrigerated cargo), can not only speed
up payout but also automate what is otherwise a difficult claims process. Multiple parties are
involved requiring extensive documentation in both claims handling (bills of lading,
charterparties and reports) and risk underwriting (data on identities, risk and exposures). This
challenge is similar to the situation in the closely related business of trade finance, supporting
digitisation and efficient automated processing through the sharing of reliable data in
standardized form. Component distributed ledger technologies are of great potential value, for
permissioning and security and for maintaining a permanent record of data, but it is still an open
question whether this should be through a distributed ledger or using these technologies with
to a conventional database.

We briefly discuss some other potential insurance applications. (FCA 2017) highlights some of
the benefits of using distributed ledgers in the reinsurance market. As multiple reinsurers are
required to underwrite each reinsurance treaty, data-sharing through ledgers would be
beneficial. (FCA 2017) though highlight that for this to work the development of standards for
risk data is critical, mentioning one recent initiative for insurance B3i which was launched in
October 2016 with members such as Zurich Insurance Group, Allianz, Generali.

In addition (FCA 2017) discuss the possibility of using smart contracts on ledgers for automated
claims settlement would be advantageous to industry loss warranty products. There are though
fundamental difficulties, as pointed out by (Edmonds 2019). Any form of indemnity insurance
requires assessment of the resulting loss and so only initial provisional insurance payout could
be automated. Smart contracts may work better for parametric products where the payout can
be precisely determined when an insured event takes place.

Others envisage distributed ledger supporting not only data sharing and automated claims
management but also supporting disintermediated P2P insurance underwriting both amongst
individuals and corporates. Such an approach is far from new – for example one important

72
https://www.isnetworld.com/hiring-clients

30
example of protection from private insurance pools are the P&I clubs protect for 90% of the
world’s sailing tonnage; similar schemes for sharing risk could it is claimed be based on distributed
ledgers and fill gaps in insurance provision (von Gunten and Mainelli 2014; Sarasola 2018).

12. International payments

Alongside application to securities settlement, much of the early attention paid to distributed
ledgers in financial services has been about application in international payments.

This is unsurprising. There have and continue to be substantial inefficiencies in international

business to business payments. Two points are broadly accepted: 73
• International business to business payments are much more costly, risky and opaque
than domestic consumer payments, taking up to five days to move from the sender to
the receiver’s bank account, lacking accompanying information and requiring
cumbersome manual instruction with relatively high charges and all too frequent errors
leading to payments delay or even outright rejection.
• Digitisation is creating an opportunity to end this situation: appropriately deployed
digital technologies should make it possible for international payments to be as rapid,
transparent and reliable as domestic consumer payments and only a little more
expensive.

Little of this requires further discussion here. We focus on a specific issue: what role if any can
distributed ledger technologies play in supporting greater efficiency in international payments?

Here we note a parallel with distributed ledger to securities settlement: misunderstanding of

the underlying business operations, in this case misunderstanding of the role of correspondent
banks in international payments that has led to much nonsense being widely stated and
accepted.

To illustrate this misunderstanding, consider Figures 5 and 6 adapted from an otherwise well
written paper from InfoSys. 74

• In Figure 5 the customer's bank holds the virtual representation of value (call this ‘virtual
gold’), transfers it a correspondent bank who sends it internationally to another
correspondent bank who in turn transfers this ‘virtual gold’ to the recipient’s bank.

73
Detailed discussion of these points can be found in various consultancy reports and practitioner media, e.g.
(Accenture 2016; McKinsey 2018; Boston Consulting Group 2018; Horowtiz and Stabicki 2018; Treasury Today
2018). Payments inefficiencies are also found in consumer payments and in domestic business to business
payments but are most pronounced in international business to business payments.
74
Figures 1, 2 from (Achanta 2018). We pick this report to illustrate the prevalent muddled thinking about use of
distributed ledger in international payments because of the clarity with which the argument is presented, similar
discussion is found in many other reports and blogs promoting ‘blockchain based international payments’.

31
 Figure 5: A mistaken representation of correspondent banking

Domestic Bank Foreign Bank

A in Cleveland in Stuttgart

Correspondent Correspondent
Bank in New Bank in
York Brussels

• Figure 6 illustrates how this ‘inefficient’ system can supposedly be improved using a
distributed ledger as the rails for communication. Put tokens for ‘virtual gold’ on the
ledger, so it can be moved directly from the domestic bank to the foreign bank and the
inefficiencies of correspondent banking are removed.

Figure 6: Leading to mistaken representation of the role of distributed ledger in

international payments

Domestic Bank Distributed Foreign Bank

A in Cleveland ledger in Stuttgart

The mistake in these figures is representing a monetary transfer as the transfer of a virtual
object, akin to the movement of gold or some other physical asset. 75 This omits two crucial
aspects of international payments.
1. Most domestic money is held in fractionally reserved bank accounts so there must be
matching settlement transfers of reserves held at the accounts of the domestic and
foreign central banks (no domestic bank can accept a payment for credit to a customer

75
(Milne 2018a) provides a detailed critique of the notion that cryptocurrencies are ‘virtual objects’ or ‘tokens’.

32
 account without a matching credit of central bank money). The reason a
correspondent bank is required is not for routing of the payment instruction but
because under current architecture and regulation banks cannot maintain accounts
directly with central banks in other countries; they need to use a correspondent bank
(or a local subsidiary) to provide them with this access.
2. The execution and settlement of any necessary accompanying foreign exchange
transaction. Only a few dealer banks have direct access to the global foreign exchange
markets. The adoption of a distributed ledger does not avoid the need to sometimes
execute the transfer with a foreign exchange transaction (where not avoided by
‘netting’ of offsetting transactions). Where a foreign exchange is required, this
requires a further layer of intermediation, passing domestic funds to the foreign
exchange dealer or other counterparty in exchange for foreign currency, with a
subsequent settlement of these two legs of the foreign exchange transaction.

Figures 7, 8 and 9 are corrected versions of these diagrams, allowing for domestic settlement
and the need to conduct a foreign currency exchange transaction and settlement.

Figure 7: A corrected representation of correspondent banking

Payment (in black)

Domestic Correspondent Foreign Bank

€
Bank A in Bank in B
Cleveland Brussels in Stuttgart
$ € €
Foreign
Exchange
Federal Dealer European
Reserve Central Bank
$ €
Settlement (in blue)
Note: Figure 7 corrects Figure 5 by including the necessary accompanying settlement processes for an
international payment. Settlement of an international payment is complex because three different stages are
required: (i) settlement of the $ payment to foreign exchange dealer; (ii) settlement of the € payment to
overseas correspondent bank; and finally (iii) a further € settlement to reach the bank of the recipient.

In Figure 7 the domestic bank A in Cleveland does not have a reserve account at the European
Central Bank. It instead holds a ‘nostro’ account with a correspondent bank in Brussels, enabling
indirect access to reserves at the European Central Bank required for settling an international
payment.

International payment requires three steps for settlement: (i) the bank in Cleveland exchanging
dollars from their reserve account at the Federal Reserve for Euros held with the foreign
exchange dealer (domestic leg); (ii) the bank in Cleveland then moves these Euros to their
correspondent bank, settling through transfer of reserves from the foreign exchange dealer to

33
the correspondent bank (foreign currency leg); 76 and finally (iii) a standard domestic settlement
in Euros to complete the payment to the recipient bank in Stuttgart.

Using distributed ledger technology to address the inefficiencies of international payments,

could involve (just as in the case of securities) either radical or limited change in payments
operations. Figure 8 (limited) and Figure 9 (radical) illustrate these possibilities.

Limited change along the lines of the following Figure 8 is the more obvious outcome. While
they can use distributed ledger technologies (for example the J.P. Morgan IINET project, one of
our case studies), this is not necessary (for example the recent SWIFT Global Payments
Infrastructure or gpi building on existing operational arrangements). 77

Figure 8: A limited re-engineering of international payments operations

Financial
Technology
$ solution
Domestic Bank € Foreign Bank B
A in Cleveland in Stuttgart
Correspon Correspon
$ dent Bank dent bank
€
€
$

Federal European
Reserve $ Foreign
Central Bank
Exchange
€
Dealer

Note: based on Figure 7 but dropping the blue arrows representing the accompanying settlement, so showing
just the payment (the black arrows) and institutions involved in supporting payment and settlement. The banks
in the US and Eurozone play the role of correspondents for the financial technology provider.

76
How can the foreign exchange dealer have reserve accounts at both central banks since they are not licensed
and regulated in both jurisdictions? The answer is that, for a major foreign exchange dealer such as JP Morgan,
wholly owned subsidiaries licensed and regulated in both jurisdictions. This detail is omitted from Figure 7.
77
gpi, as a relatively small shift from existing arrangements, is relatively easy for participating banks to implement
and is achieving rapid adoption. Since it makes no claim to use distributed ledger technologies, is not one of our
case studies. It is described in (SWIFT 2018).

34
 Figure 9: A radical re-engineering of international payment operations

Domestic Bank Foreign Bank B

A in Cleveland in Stuttgart
Financial
$ Technology
solution €

Federal European
Reserve $ Central Bank
€

Note: Amendment of Figure 8, combining the roles of financial technology, correspondent banks and foreign
exchange dealer into one “super platform”.

Many distributed ledger solutions for international payments seem to have in mind a much
more radical approach, such as that illustrated in Figure 9. In order to achieve all the benefits
that are claimed this (as we understand it) will requires two broad changes in international
payments architecture: 78

• Central banks must be willing to allow all direct participants in the new technology
based international payments platform, whether domestic and foreign, to hold reserves
for settling foreign exchange either directly or through accounts fully backed by central
bank money. This will in turn allowing them to offer execution services for international
payments passing through the payments platform.
• A replacement of the main dealer structure of global foreign exchange markets with
something closer to the market microstructure employed in equity transactions. All
direct participants in the new platform would be able to place both limit and market
orders from their central bank reserve holdings on limit-order books for foreign
exchange.

Together these two changes could offer a ‘single ledger’ solution to simplify foreign exchange
operations, offering all clients complete visibility of their international payments transaction.
They would be able to trace when their payment was placed as a market order and hence
confirm a fair market price. Competing international payment service providers would provide
low cost execution with complete payments tracking and full accompanying information. An
international payment would be as transparent as ordering a ride through Uber and observing
the processing of the service.

78
As will be obvious, this analysis implies that ‘XRP’ the Ripple cryptocurrency has no future role as a payments
solution, introducing it into the payment chain only creates a further layer of intermediation from say $ to XRP
and XRP to €.

35
As we discuss below, two of our case studies – Ripple and Fnality settlement coin – have
potential for going beyond the limited technological solution of Figure 8 and providing
something closer to the radical solution of Figure 9.

We complete our discussion of international payments by commenting on proposals to use

distributed ledger to support international remittances and reduce transactions costs (currently
around $25bn per year.) 79 There has been a lot of discussion about application of distributed
ledger to reduce the cost and lengthy time involved in international remittance payments, with
a number of start-ups seeking to address these limitations. 80 There are reports highlighting the
potential; 81 but these lack any discussion of operational detail into how it might actually work.
Those reports that do examine the detail are more sceptical. 82 There are some claims that
Bitcoin is achieving traction as a remittance mechanism, but no clear evidence that this is
happening on any scale (outside of remittances to economies such as Zimbabwe, Venezuela
and Argentina where capital flight seeking to evade state controls on foreign currency
transactions provides a natural outgoing counterparty for an inward remittance transaction,
which can therefore get a much more favourable exchange rate than through official channels).
What evidence is available suggests a major role for behavioural and other biases in user
adoption: the important market position of established providers such as Western Union seems
safe for now, even though their market share and margins are being squeezed by competition
from online alternative foreign exchange providers such as Transferwise. These new
competitors, moreover, while using internet technologies and offering transparent real-time
quotations for exchange do not employ distributed ledgers. It seems clear that while it is being
digitized and costs are slowly falling, distributed ledger or cryptocurrency (blockchain) solutions
are having little impact on global remittance markets. 83

D Regulatory oversight

13. Client on-boarding

One frequently proposed application of distributed ledger technology is customer on-boarding,

including support for reliable third-party information that will allow lower cost compliance with
KYC regulations without unnecessary multiple repetition of compliance process. This is a clear
example of potential benefits from multiple users creating and using data and therefore a natural
use case for distributed ledger technologies: as (Weinberg 2019) argues “Blockchain in KYC is one
of the most promising applications of the decentralized technology, serving a real need by
decreasing KYC administrative costs and lost time while at the same time increasing security and
transparency. KYC using blockchain represents a true paradigm shift, away from individual
institutions doing repetitive and redundant work.”

79
The World Bank report a weighted average cost of 5.20% of the value remitted for 2019Q1 (World Bank 2019)
on total remittances to low and middle income countries of over $500bn per year.
80
A dozen remittance focused blockchain start-ups are listed by (Flore 2018)
81
For example (Parulava 2017; Flore 2018)
82
For example (Wu 2018) identifies four barriers: inefficient correspondent banking relationships; lack of
competition in remittance ‘corridors’; KYC/ AML and other regulation; and undeveloped agency networks for
converting from digital to cash. He suggests that distributed ledgers only deal with the first two of these barriers.
As we have argued, even this would require radical change in ‘payment rails’.
83
A valuable, regularly updated webpage, providing a lot of evidence that supports a sceptical view of the
application of distributed ledgers to remittances is (Save-on-Send 2019).

36
Amongst analyses suggesting this use (Patel 2017), a report released by R3, argues that a
combination of a global distributed ledger based utility plus robust country level KYC protocols
could substantially reduce costs of on-boarding and help overcome the withdrawal of
correspondent banking services resulting from ‘de-risking’, reluctance to engage in
international payments services because of the risk of substantial fines for breach of AML
regulations. Other similar argument include (Lootsma 2017; Curry 2018; Middleton 2019).

Despite this enthusiasm, other examinations of the application of distributed ledger technology
to identity, KYC and ALM compliance that look more closely at practical implementation are
more cautious e.g. (Refinitiv 2017; GMSA 2018; Group 2018). Our search for commercial scale
applications of distributed ledger in financial services, we found none relating to KYC. This
should not be so surprising. The concept of a shared utility for implementing KYC is something
that has been around for a long time, predating the interest in distributed ledger technologies.
The reasons this has not already been developed do not seem primarily to be technological.
Distributed ledger technologies can obviously help, but as we have argued already, they do not
themselves generate trust, there has to be additional mechanisms to ensure that the
identifications placed on a shared ledger are accurate and in compliance with regulation. A
regulated firm’s legal liability for KYC compliance cannot be automatically delegated to a third-
party, so governance needs to be in place to ensure there is effective compliance service. While
there could still be substantial gains, it is not so surprising that the challenge of co-ordinating
such a solution has not yet been overcome.

14. Regulatory reporting and systemic risk

Since the global financial crisis, regulators are expecting to be able to access and analyse large
volumes of data in order to monitor and respond to systemic financial risks. To enable this
multiple providers need to share their transactions and other data in consistent formats. This
though can be ‘many to one’, many providers of information but one user, in which case it not
clear that this needs a decentralized solution. Where it is multiple user, e.g. sharing of
regulatory data between agencies or across jurisdictions, a decentralized solution may be more
appropriate but there may be legal limits to the ability to this data sharing. Such ‘granular
reporting’ has been an ongoing topic of discussion amongst global regulators and can clearly
be supported by the control over data access provided through distributed ledger technologies
(Bank of England 2015; Kavassalis et al. 2017; Coeure 2017).

We have come across examples where components distributed ledger technologies are being
applied in this way. ISDA is working the FCA and BoE surrounding regulatory reporting and the
CDM (ISDA 2019d) . Other proof of concept of the Project Maison where the FCA worked with
R3 and other industry partners on distributed ledger based regulatory reporting for mortgage
exposures; and the BARAC project with researchers at University College London on automated
regulatory reporting and compliance are discussed in (FCA 2017).

Central banks and regulators are justifiably concerned about the role of collateral management
in any future financial crisis. Since the global financial crisis requirements for widespread posting
of collateral, either against central counterparties or bilateral positions, were introduced to
provide an additional defence against counterparty credit risk. The idea was to ensure that the
equity capital of firms remains adequately protected when other firms fail. This though has
resulted in risks of loss of equity capital being replaced by heightened liquidity risk, especially
since collateral requirements are inevitably ‘procyclical’ rising at times of heightened systemic
37
risk and potentially limiting the ability of firms to trade (and the equity capital requirements have
themselves been reduced as the increased use of collateralization has lowered calculated
counterparty risk, so arguably overall systemic risk has been increased not reduced).

A related concern about there being “sufficient good quality collateral” in the system to ensure
problems of trading liquidity do not exacerbate a financial crisis, the view of the authorities being
that there is no overall problem, but some individual firms might face difficulty in accessing cash
or securities to maintain their access to markets (in contrast to the situation of commercial
banks, there is no lender of last resort so capital markets firms without banking licenses may
have to rely on market access to cash and highly quality securities). Regulators will therefore be
especially concerned to ensure that the automation of collateralization and liquidity
management using distributed ledgers does create unintended consequences, especially during
periods of heightened systemic risk when access to liquidity is problematic.

3.2 Seven case studies

Table 3 summarizes our seven case studies and the information we have obtained from them:

Table 3: Summary of our seven case studies

Initiative Launch Expected Full Supporting Digital ledger
deployment Technology on our
Definition 1?
Digital Asset and ASX 2015 March – April DAML No
collaboration on CHESS 2021
replacement
ISDA’s common domain model 2016 2019 DAML No
CDM implemented using Digital
Asset DAML
DTCC’s Trade Information 2016 Q4 2019 Hyperledger No
Warehouse DLT re-platforming Fabric
Utility Settlement Coin (USC) 2015 Live ‘as soon Clearmatics Yes,
now renamed as Fnality. as possible’ platform permissioned
(2020?) (permissioned
Ethereum)
SETL IZNES platform for 2017 Live 2018 full SETL ledger Yes,
Investment funds transactions uptake 2020+ platform permissioned
J.P. Morgan Interbank 2017 Network Quora No
Information Network IIN expanding, live (permissioned
in 2019 Ethereum)
Ripplenet suite of products 2013 Ongoing Own platform Yes, hybrid
(xCurrent, xRapid, xVia)
Note: these cases illustrate the range of possibilities when using the component DL
technologies listed in Table 1. Several (e.g. ASX, ISDA, and J.P. Morgan) have a single operator
rather than multiple operators. Only ASX and ISDA make important use of smart contracts. The
DTCC and J.P. Morgan networks are focused on information sharing not transfer of ownership.

We discuss each of these case studies and then provide a concluding summary.

38
Case study 1: ASX’s collaboration with Digital Asset to modernise Cash Equities Clearing and
Settlement in Australia.

Profile

ASX is the Australian Securities Exchange. ASX have prided themselves on the technical capacity
of their exchange, and in particular the efficiency of their ‘CHESS’ clearing and settlement system
established in the early 1990s which has maintained close to 100% reliability for more than a
quarter of a century. ASX members were increasingly interested in the replacement of CHESS
with a system more aligned with the modern digital technology solutions they were using for
their own internal portfolio, trading and risk management systems.

Digital Asset is a software company founded in 2014 to provide the tools and services that allow
innovators to harness smart contracts and the power and security of blockchains. Digital Asset is
the creator of DAML™ — the smart contract language for modelling multi-party business
workflows on traditional databases or enterprise-scale distributed ledger technology (DLT).
DAML enables enterprises from start-ups to large, highly-regulated organizations to achieve
more efficient business processes, reduce risk, and develop new products and services that can
transform an industry.

Products and/or applications

The history of the ASX project is thoroughly documented on the ASX webpages (ASX 2019) . ASX
first began exploring the possibility of replacing CHESS in 2015 selecting Digital Asset as a partner
in January 2016 (Digital Asset, 2016). The project fully replaces CHESS (Clearing House Electronic
Subregister System), ASX’s twenty five year old system for post-trade clearing and settlement, ,
with a modern ISO 20022 compliant system. 84 Digital Asset first developed a prototype system
using their distributed ledger technologies which was then reviewed in Dec 2017, testing its
ability to replace CHESS functionality, to provide appropriate security and to scale to support
expanded services in future y ears.

Alongside this exploratory work ASX launched detailed consultations with ASX members about
the CHESS replacement beginning with a September 2016 consultation paper (ASX 2016)
followed by the establishment of working groups focusing on clarifying the business
requirements for six aspects of the new system (account structures and participant models,
corporate actions, transfers and conversions, settlement enhancements, data storage and
reporting, other ‘non-functional’ requirements). This input then led to a second detailed
consultation paper “New Scope and Implementation Plan” with the consultation and ASX’s
response continuing until September 2018 (ASX 2018). 85 A further development was the
establishment of a technical committee to ensure that the project was fully compliant with ISO
20022 standards for messaging in payments, clearing and settlement.

ASX is now moving onto establishing further working groups on transition topics such as
connectivity, integration, implementation and transaction; alongside demonstrations of the

84
(Computerworld 2018a)
85
One decision in Sept 2018 was that go-live should take place over a single weekend, but to allow an additional
six months from original planned start date in 2020 so that users to undertake the necessary developments of their
own systems. This was widely interpreted in the trade press as “delay” e.g. (Crozier 2018) but is more favourably
and we would say appropriately interpreted as a flexible response to stakeholder feedback.

39
Digital Asset prototype to ensure all stakeholders are fully familiar and comfortable with the
replacement system. Their forward planning includes a customer development environment
(now available), an industry wide test environment from July 2020, a pre-live production
environment from mid-October 2020 and a target go-live window of March- April 2021.

We highlight the following points about the ASX project:

• The clearing and settlement at ASX, rather like that for Deutsche Börse in Germany but
unlike arrangements in the US or the UK, is provided by an exchange owned utility
providing both clearing through ASX Clear (the central counterparty that guarantees
trades and supports anonymity of trading) and subsequent DVP (delivery versus
payment T+2 settlement).

• The six year implementation period from initial discussion in 2015 is nothing out of the
ordinary for an investment in post-trade infrastructure. The full views of users have to
be considered and built into the project.

• Digital ledger technologies are a valuable contributing component of this project. The
CHESS replacement has been billed as “the first blockchain based securities settlement
system”, but this is something of an overstatement. It will be permissioned with
rigorous control of access; the ledger is under the overall control of a single operator -
ASX (so not a distributed ledger under our Definition 1). From the perspective of many
users they will not be able to tell how and to what extent the underlying system is using
new distributed ledger technologies (permanent record keeping, cryptographically
controlled control over reading and writing privileges), though it will offer opportunities
for additional functionality based for example on automated ‘smart contracts’.

• T+2 will remain as the standard settlement cycle, with cash and securities “locked for
settlement” at 11.30 am on T+2 to avoid a settlement failure. There will, however, be
an option for agreed accelerated bilateral settlement, which it is anticipated will be used
for occasional large trades (presumably ‘upstairs’ trades undertaken for strategic rather
than trading reasons, negotiated privately and then reported to the exchange) i.e.
flexibility in the timing of settlement but only likely to be used in very specific
circumstances.

• A key feature of the project will be to allow supporting automated processing through
algorithmic or smart contracts written in Digital Assets DAML language. This may for
example be applied to automation of corporate actions, allocation of proceeds of trade
by fund managers, the provision of data services and other aspects of the digital
automation of securities holdings and transactions. 86 An advantage of DAML over other
smart contract platforms is that written agreements through DAML can remain private
and do not have to be shared across multiple nodes in a network. 87

86
On data services application to ASX see (Financial Review 2018). Another example of application of DAML was
October 2018 announcement that Hong Kong Exchanges and Clearing (HKEX) has partnered with Digital Asset using
DAML to improve efficiency of connection to the mainland Chinese market (Ledger Insights 2018b).
87 (Computerworld 2018b). In private communication Digital Asset DAML has been described to us as “a powerful
smart contract language for modelling multi-party business workflows on traditional databases or enterprise-scale
distributed ledger technology (DLT). DAML enables enterprises from start-ups to large, highly-regulated
organizations to achieve more efficient business processes, reduce risk, and develop new products and services that
can transform an industry.”

40
Case study 2: ISDA collaboration with Digital Asset on their Common Domain Model (CDM)

Profile

International Swaps and Derivatives Association (ISDA) is the trade organisation supporting the
global over the counter (OTC) derivatives market. It now has around 820 members in nearly 60
countries. ISDA’s Common Domain Model CDM (which is more fully described above) has been
in development since 2016 in order to provide a precise common language for describing all the
events and processes involved in processing of derivative contracts (it is thus no accident that
the name chosen for the organisation providing technical support for the releases of the various
versions of the CDM is Rosetta Technology. CDM is now in open source release as version 2.0.

Digital Asset: see profile above under their collaboration with ASX.

Products and/or applications

The ISDA CDM first industry solution to try to standardize the representation of derivatives trade
events and processes. (ISDA 2019b). ISDA proposed the Common Domain Model in May 2018
and within a year has already obtained supported from R3, Axoni, Goldman Sachs and Barclays.
(Coindesk 2019b). (Braine 2019), CTO of Barclays speaking at Digital Asset’s conference
Synchronize Europe, 2019 was very positive about industry level standards and hence ISDA.

(Clive Ansell 2019), Head of Market Infrastructure and Technology, ISDA in the same conference
argued that the key issues are all about “standards”, not technology. ISDA is looking at use cases
and supporting cooperation, critical as ISDA has proposed standards before but the effectiveness
of any new standard depends upon successful adoption. 88

ISDA Common Domain Model is a “blueprint for how derivatives are traded and managed across
the trade lifecycle” (ISDA 2019c). The aim is to standardise derivatives trade and processes coding
and to obtain consensus among the industry on standards. (Ledger Insights
2019a).Consequently, it hope to achieve agreement on the “representations for events and
processes”. (ISDA 2019c) argues that the benefits include i) “golden source of trade data”, 2)
environment for innovation, 3) improved regulatory oversight. This could save substantial
amount of money as much as $2.5 billion.

In February, 2019, ISDA released version 2.0 its Common Domain Model (CDM) and in March
2019 it published the full version opening access to all market participants (ISDA 2019b). In April
2019 ISDA and DA announced they are working together to develop an open-source reference
code library to support the adoption of the CDM. DA’s DAML will be used as a common language
with the code library enabling ISDA CDM to fully integrate with DAML (Digital Asset/ ISDA 2019).

This project is still at an early stage, but given the central importance of ISDA to global OTC
derivative markets, we anticipate that DAML supported smart contracts will be widely applied
to derivatives processing in the not too distant future.

88
For a broader discussion of the challenges of setting standards in wholesale financial markets see (Houstoun,
Milne, and Parboteeah 2015)

41
Once again, we conclude that according to our Definition 1, this is an initiative does not employ
a distributed ledger solution. The sharing of data is supported through the standardisation of the
common domain model not the sharing of data on a ledger with multiple operators. The
standardisation and sharing of data then in turn supports the use of smart contracts, illustrating
that these do not require agreement on data but not a distributed ledger per se.

Case Study 3: DTCC’s Trade Information Warehouse (“TIW”) DLT

Profile

DTCC is the clearing and settlement institution for US securities transactions. It also provides a
number of other post-trade services in money and derivative markets.

DTCC has been responsible for supporting the Trade Information Warehouse for credit
derivatives since 2006. This currently automates the record keeping, lifecycle events, regulatory
reporting and payment management for $10 trillion of cleared and bilateral credit derivatives.
DTCC entered the test phase of relaunching TIW on DLT and cloud in November, 2018, as detailed
on its webpages (DTCC 2019). The firm is looking to go live on the service in Q4 2019.

Products and/or applications

DTCC is working with IBM, Axoni and R3 to re-platform DTCC’s Trade Information
Warehouse (“TIW”). 89 Consequently, a derivatives distributed ledger solution for post-trade
processing based on existing TIW capabilities and interfaces with technology providers and
market participants. The solution has been developed with input and guidance from Barclays,
Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, UBS, Wells Fargo, IHS Markit and Intercontinental
Exchange. IBM leads the initiative, Axoni provides the distributed ledger infrastructure and smart
contract applications, with R3 as a solution advisor. The PoC was successfully completed in 2016.
The re-platforming will support TIW’s separation from MarkitSERV’s credit derivative
confirmation system. It will be replaced with a combination of DLT and cloud technology. TIW’s
current mainframe system will be replaced with cloud technology.

The existing TIW system “… is a centralized, electronic database holding the most current details
on the official, or “gold,” record for virtually all cleared and bilateral credit default swap (CDS)
contracts outstanding in the global marketplace. The Warehouse contains more than 50,000
accounts representing derivatives counterparties across 95 countries. DTCC also offers CDS
Kinetics, weekly stock and volume reports that deliver detail on global CDS contract activity;
historical data older than six months is available as a separate report.” (DTCC 2019)

A key feature of this project is that the Axoni solution is to be built using the open source tools
provided by the Hyperledger Fabric, where both DTCC and IBM are closely involved. 90 An
important feature arguably of this project is its collaborative nature, involving close consultation
with a range of stakeholders and using open source technologies to ensure that transparency for
the underlying technological architecture and to allow all users to fully operationally integrate
with the solutions as it develops. The solution uses Distributed Ledger Technologies, but the

89
(DTCC 2017b)
90
See (Bear 2017)

42
upgraded functionality does not require a distributed ledger, there is as we understand the
project essentially one ledger, which will now be cloud based and where multiple users can
update their own records. So once again this is not a distributed ledger according to our
Definition 1.

DTCC suggested that it expected to launch the re-platformed TIW for credit derivatives using
DLT by the end of 2019 (DTCC 2019). An article on 20 September, 2018, suggested that DTCC
passed TIW milestone, with the chief technology architect suggesting they finished coding TIW.
The chief technology architect noting that functional coding for TIW completed in September
2018, and as of yet testing is continuing.

Case Study 4: Fnality (formerly known as Utility Settlement Coin (USC))

Profile

Fnality is the commercial implementation of Utility Settlement Coin or USC project (Coindesk
2019a). It is an asset-backed digital cash instrument implemented using distributed ledger
technologies, with a version for each of five major currencies (US dollars USD, Euros EUR, British
pounds GBP, Japanese Yen JPY and Canadian dollars CAD).

USC was started in 2016 as a co-operation between UBS and distributed ledger technology
company Clearmatics. 91 Involvement increased to 17 banks including BNY Mellon, CIBC, Credit
Suisse, Deutsche Bank, HSBC, MUFG, NEX, State Street and Santander. (Coindesk 2018b) R3 tried
unsuccessfully to persuade USC’s bank members to build the project on Corda instead of using
Clearmatics but this approach was rejected. 92 It developed a proof of concept during the
research and development stage of the project.

To take this project forward to commercial scale 14 of the world’s largest banks have invested in
Fnality. As described on their website (Fnality 2019a) “Fnality International has been founded to
create a network of decentralised Financial Market Infrastructures (dFMIs) to deliver the means
of payment-on-chain in tomorrow’s wholesale banking markets. Fnality, backed by a consortium
of Financial Institutions, including many of the Globally Systemically Important Banks (GSIBs),
who sponsored the “USC Project” believe that there will be widespread adoption of tokenisation,
both for new and for existing assets, creating new Value Chains. A means of payment is an
essential need for those Value Chains. The founding shareholders of Fnality comprise: Banco
Santander, Bank of New York Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, ING, KBC
Group, Lloyds Banking Group, MUFG Group, NASDAQ, Sumitomo Mitsui Banking Corporation,
State Street Bank & Trust, and UBS. Clearmatics continues in its role as the technology partner to
Fnality.” These banks have invested £50mn in Fnality in the Series A equity round (Ledgerinsights
2019a).

Products
Fnality is building a ‘tokenized’ versions of five major fiat currencies (Coindesk 2019a). What does
this mean? The holdings of USC will fully backed 1:1 with central bank money, eliminating credit

91
(UBS 2016)
92
(Coindesk 2019a)

43
risk. But because they are held on a distributed ledger, transfers amongst holders on the ledger
will support instantaneous ‘peer to peer’ transfer of this central bank money. According to Chief
Executive Rhomaios Ram, as quoted in (Coindesk 2019a), this will complement other projects for
supporting financial transactions on distributed ledger by allowing the cash leg of any Delivery
against Payment DVP exchange to take place instantaneously in tokenized funds i.e. money fully
controlled by the market transactor rather than relying on banking services from a commercial
bank. In this way non-banks would effectively gain access to central bank balance sheets. In the
same article Robert Sams of Clearmatics the technical partner supporting Fnality states that
“Legal settlement finality is happening inside the system’s blockchain rather than across the
books of a legacy settlement institution. This might appear to be a subtle distinction, but it’s what
turns a cryptographic key pair into cash itself. It’s a foundational distinction.” We agree that this
is a key distinction: when relying instead on a commercial bank the cash leg of a financial
transaction is dependent on a further settlement, with the commercial bank making the required
transfer of funds through the large value RTGS system on behalf of the market participant, only
when this has happened is the trade fully settled and final.

Fnality’s distributed ledger architecture developed by Clearmatics is a private permissioned

version of Ethereum called Autonity (Coindesk 2019a). Sams is quoted describing this as “A
distributed state transition system, where all participants on the chain keep a continually updated
record of the blockchain’s full state, is essential to ensure the system’s resiliency.” There will be
a wide range of potential applications of Utility Settlement Coin USC (as the tokenised currencies
will still be called) across all the securities, derivative and money market and foreign exchange
applications we have discussed earlier in this section.

A recent white paper from Fnality, especially chapters 5, 7 and 10, explores the range of use
cases in which USC may be applied.93 This focuses on the use of nostro accounts with
correspondent banks for settlement of foreign exchange transactions. Fnality offers the
opportunity of replacing such nostro accounts with what is, effectively direct access to central
bank money. The key is what they refer to as ‘atomic settlement’. This is simple a fancy way of
saying that provided both the sender of money and the recipient hold accounts on the single
USC ledger, then a movement of value between them requires no further process of settlement.
This is quite different from a payment where the sender and recipient hold accounts with two
different commercial banks, including nostro accounts with correspondent banks. These must
be settled using central bank money; and, as explained in our Figure 7, the reason for using the
nostro account is to give foreign banks without direct access to central bank money the ability
to make and settle domestic payments.

One of the most obvious application is in simplifying the ‘PVP’ settlement of foreign exchange
transactions between any of the five Fnality currencies. As long as payer and payee in both the
buying and selling legs of the transactions hold sufficient funds in USC then it straightforward to
make a genuinely simultaneous payment v. payment of the two legs of the foreign exchange
contract(or of a set of netted contracts). This is problematic when funds are held in a nostro
account. This reduces counterparty risk and the need to hold collateral. It can potentially
radically simplify the management multi-currency liquidity risk for international banks, because
of the greater transparency of and control over the settlement of foreign exchange transactions.
It can also in turn allow greater competition in foreign exchange markets, because smaller banks

93
(Fnality 2019b)

44
need not rely as much as before on the main foreign exchange dealers for supporting execution
and settlement.

It will still take some time for full commercial applications of Fnality’s USC. The challenge they
have set themselves is described on their webpages as follows (Fnality 2019c)“the focus for
Fnality is now to create and deploy a solution incorporating Legal, Regulatory, Operational and
Technical aspects, to create a regulated network of distributed Financial Market Infrastructures
(dFMIs) to support global exchange of value transactions.” There are however always two sides
to every trade, so while this sorts out the cash leg, it may take quite substantial further work to
ensure that USC is integrated into for example established securities settlement processes. Our
judgement is that the first applications of USC will be in those areas of application, e.g. cash
collateral management, OTC derivatives processing, where existing processes are most
fragmented and the ability to transact directly in the equivalent of central bank money is most
useful. Integration with smart contract languages such as that of DAML would seem to be a very
real possibility.

We also envisage an opportunity for using USC for settlement of foreign exchange outside of the
network of global foreign exchange dealers and the established CLS system for net settlement (a
kind of ‘alternative venue’ for foreign exchange that could lead to a narrowing of margins in
foreign exchange dealing). Once established USC transactions may then gain further traction,
leading closer to radical transformation of international payments envisaged in our Figure 9
above, but full adoption is likely to be a matter of some years.

Case Study 5: SETL IZNES platform for mutual funds management

Profile

SETL is a London based institutional payment and settlement infrastructure provider. Citi and
Credit Agricole Investment Bank, Computershare, S2iEM and Deloitte are shareholders in the
company. SETL was launched in July 2015 to deploy a multi-asset, multi-currency institutional
payment and settlements infrastructure based on blockchain technology 94. SETL offers the
ability for users to move cash and assets directly between each other, facilitating the immediate
and final settlement of market transactions. It has been actively working on a number of global
platform implementations across the post-trade market. FN’s Trading and Technology Awards
included SETL (along with Cobalt, DTCC Trade Information Warehouse, R3, Utility Settlement
Coin) in the shortlist for their blockchain initiative of the year (Fnlondon, 2018a) in March, 2018.

We focus on what seems to be their most successful product, the IZNES platform for funds
allocation.

Product

IZNES is a pan-European record keeping platform for EU mutual funds utilizing SETL’s a
proprietary permissioned distributed ledger solution. 95 OFI AM, Arkéa IS, Groupama AM, La

94
(SeTL 2018)
95
(Siliconangle 2017)

45
Banque Postale AM, La Financiè re de l’E�chiquier and Lyxor AM are the six founding shareholders
of IZNES. A capital reorganisation of SETL saw the end of its own shareholding in this project in
May 2019, but it continues to be the technology provider. IZNES continues to enlarge the group
of French and Luxembourg asset managers using its service.

IZNES went live in March, 2019 and now has over €1bn of assets registered on its platform. . The
platform is described on their webpages (IZNES 2019) “The Blockchain based pan-European
platform for investment in UCITS units and recordkeeping compatible with all distribution
channels”. It offers companies the ability to develop new investor relationships, handle
subscription instructions, manage KYC processes, execute corporate actions and settle
transactions and record positions. IZNES now has over 20 active fund managers using its services
in Europe (Fnlondon, 2018a). France’s securities regulator has provided SETL a license to operate
a central securities depository system using its distributed ledger technologies (Coindesk 2018a).

As discussed above, funds management have some of the most fragmented business processes
in financial services. IZNES offer simplification for example avoiding the need to have a transfer
agent taking responsibility for subscriptions and redemptions (the current manually orientation
of the transfer agent services and the potential for efficiency gains in these services driven by
technological change, including IZNES is discussed in (Pratt 2018)).

An open question is whether a distributed ledger solution – according to our Definition 1 – is

essential to the IZNES : why not allow each fund to be the responsible operating institution for
its own ledger? Our interpretation is that the distribute ledger supports a standardised solution
that can be offered to many fund managers, allowing them to focus on their own value added,
risk management, portfolio selection and marketing, while effectively outsourcing key elements
of technological support. So as we understand IZNES the distributed ledger approach her is not
so much about creating a distributed financial ecosystem that will replace traditional
intermediation, but rather allowing financial intermediaries to share and hence outsource
common supporting technologies. In turn over time this may support a variety of other functions,
for example closer involvement of mutual fund investors in corporate governance.

46
Case Study 6: J.P. Morgan’s Interbank Information Network (IIN)

Profile

J.P.Morgan is the world’s largest global transaction bank, and has prioritized tehcnological
innnovation as a strategic priority across its business lines.

J.P.Morgan’s blockchain-based cross-border payment product, the Interbank Information

Network (IIN), began development in 2017 with the involvement of the Royal Bank of Canada
and the Australian and New Zealand ANZ Banking Group, and by late 2018 signed up more than
75 banks to help with testing.96 As of 22 April 2019 IIN had grown to over 220 banks, tackling
cross-border payments in Africa, Asia, Europe, Middle East and Latin America. 97

As well as IIN, J.P.Morgan has launched its own wholesale token coin project, J.P.Morgan Coin,
with some similarities to Fnality’s USC. We do not discuss their coin further in this report.

Product

IIN was initially announced in October 2017 during a trial involving a small number of partners.98
IIN uses Quorum, a permissioned-variant of the Ethereum distributed ledger software to reduce
friction in global payments. 99 It was initially to address compliance issues, but as described by
John Hunter, J.P. Morgan’s head of clearing in the Financial Times, it has been extended to
address the wide range of issues that can require manual interventions in payments (e.g. errors
in account number, routing code or other aspects of the transaction) enabling real-time
verification that a transaction is being sent to a valid account). 100 Hunter suggests that IIN
reduces the high rate of exceptions requiring manual intervention that can be as much 5-20% of
international payments. According to the Financial Times article the platform was expected to
go live in Q3 2019 (though we have found no official annoucment of this yet). The J.P. Morgan
webpage for IIN listed 365 participating banks as of 14 November 2019. 101

IIN is essentially a communication and information system, like SWIFT’s gpi and Ripple’s
xCurrent, a solution corresponding to our ‘limited re-engineering’ illustrated in Figure 8. Value is
not transferred on IIN. While full details have not been disclosed in the public domain, it appears
that the crucial technological component is the cryptogrpaphicaly secured permissionning, so
that every institution involved in a payment can see and exchange information on a particular

96
Announced in (JP Morgan 2017, 2018).
97
See (Financial Times 2019)
98
In (JP Morgan 2017). Other institutions involved include, India’s ICICI Bank, Bank of Sharjah, National Australia
Bank Limited, and others. (Coinspeaker 2019) The network continues to expand. For example June, 2019, JP
Morgan’s IIN has been selected by Chong Hing Bank to exchange payments related information. Note this Chong
Hing Bank is the first Hong Kong to join the network.(Asset Servicing TImes 2019).
99
A related initiative illustrating the wider potential use of Quorum is ‘Project Khokha’ Settlement System in South
Africa, for which the proof-of-Concept (PoC) established the possibility of conducting interbank transfers using J.P.
Morgan’s Quorum. The aim is “to build a proof-of-concept wholesale payment system for inter-bank settlement
using a tokenized South African rand on distributed ledger technology.”(Newsbtc 2018)
100
Quoted in (Financial Times 2019)
101
Authors calculation from the list of participating banks on J.P. Morgan webpage for IIN (J.P.Morgan 2019). Of
these 51 are in the Americas, 46 in the EEA, 136 in Asia-Pacific, 105 in rest of Europe, middle east , central Asia and
Africa together with a further 27 banks that have not disclosed their participation.

47
payment from the tine of intiial execution, and hence also provide immedaite validation of
payment instructions.

Case Study: 7 Ripple 102

Profile
Ripple is one of the most prominent initiatives using distributed ledger technologies in financial
services. Its goal is to use these new technologies to provide alternative mechanisms of
international payments that reduce the substantial costs and inefficiencies of current
conventional systems. It is though difficult to understand: as we shall discuss it is not always
clear exactly how Ripple products will address these costs and inefficiencies, especially the costs
and inefficiencies associated with correspondent banking.

We will first provide a short history of Ripple and then summarise and critically assess their
solutions. We discuss this case at greater length than the other six, primarily because Ripple,
unlike the other case studies, promises fundamental disruption to existing financial processes
along the lines of our Figure 9.

The following quotation provides a succinct summary of the establishment of Ripple: “In 2004, a
developer named Ryan Fugger developed a payment protocol and decentralised platform,
Ripplepay, to create a financial network that could work without banks, amongst others by peer-
to-peer lending. In early 2011, Arthur Britto, Jed McCaleb, and David Schwartz formed a team,
working on what we know today as the XRP ledger, focusing on creating an alternative system
to optimise where they found weaknesses in Bitcoin, e.g. to eliminate the risk of 51% attacks ….
In August 2012, Chris Larsen joined the team, and after this, they approached Ryan Fugger to use
their digital currency with his credit network. Fugger agreed to support the new effort, and the
team founded a new company known as OpenCoin with full control of what was previously known
as Ripplepay. Over the next years roughly $9 million USD funding was secured, and in 2013 they
reverted the brand to its “Ripple” origin, Ripple Labs, Inc [and now referred to just as Ripple]
while also making the source code public to make the project maintainable by the community.
To ensure the sustainability of the company, the founders decided to donate XRP to the company
(OpenCoin): Company (OpenCoin) [in 2013 as follows]: 80 billion XRP, Jed McCaleb:9 billion, Chris
Larsen: 7 billion, Other Founders: 4 billion.” (Silkjär 2019). 103

Ripple has raised substantial external funding. Most of this has been secured between 2016 and
2019, because Ripple has (according to Ripple market reports summarised on Wikipedia) raised
some $1.14bn by sale of XRP on crypto exchanges, reducing its holdings of XRP from 80% to 60%
of the total. According to (Silkjär 2019), of this 60% , 55% is held in a cryptographically secured
and software controlled ‘Escrow’ and cannot be used for business purposes, while Ripple retains

102
We sent a draft of this case study with Ripple’s public relations team in early-Sept, 2019. They responded saying
that our summary contains inaccuracies. We offered them the opportunity to correct any inaccuracies by end-Sept.
They did not come back to us.
103
This is evidence of the strong technical knowhow at Ripple. For example JedMcCalebwho has since left Ripple
to found Stellar, a cryptocurrency that claims to avoid the high resource costs of proof of work used by Bitcoin.
From their webpages (Stellar 2019) “Fundamentally, Stellar is a system for tracking ownership. It uses an
accounting ledger, shared across a network of independent computers, to store two important things for every
account holder: what they own (their account balances) and what they want to do with what they own (operations
on those balances, like buy or sell offers.) …. Stellar has been running for four years and has handled over 450
million operations by over 3 million individual accounts. Transactions cost roughly 1/millionth of a dollar.”

48
5%. Ripple can be regarded as the first ‘ICO’ (even though the issue of XRP preceded these sales
to outsiders and initial coin offerings were really only established after this initial 2016 sale of
XRP). The amount of funding raised through sales of XRP substantially exceed the $96mn raised
in conventional Angel, Seed and Series A and Series B funding. 104

At the time of writing (Aug 18th, 2019) the market price of XRP was $0.288 giving it a total market
value of $12.35bn. This means that the 5% retained by Ripple is worth $618mn, even though
there has been a major fall of around 90% since its peak valuation in January 2018. The value of
XRP has fallen much further than that of Bitcoin’s XRP (which fell by 75% from its Dec 2017 peak
but has since recovered to around 60% of its December 2018 valuation i.e. the valuation of XRP
in terms of XRP has fallen by more than 80% in 18 months). This has led to lawsuits against Ripple
arguing that they have failed to support the price of XRP, but Ripple argues that XRP is a
commodity and its pricing (in part because of its decision to Escrow 55% of XRP) is entirely
outside of its control. 105

Ripple supported its efforts to improve international payments by announcing in 2016 the
establishment of a Global Payments Steering Group. 106 Their announcement at that time stated
that “Ripple, the global provider of financial settlement solutions, today announced that a
number of global banks are joining forces to establish the first interbank group for global
payments based on distributed financial technology. Bank of America Merrill Lynch, Santander,
UniCredit, Standard Chartered, Westpac Banking Corporation, and Royal Bank of Canada are the
founding members of the organization, known as the Global Payments Steering Group (GPSG).
The GPSG will oversee the creation and maintenance of Ripple payment transaction rules,
formalized standards for activity using Ripple, and other actions to support the implementation
of Ripple payment capabilities. CIBC will also join the GPSG as a new member.” GPSG was then
joined in March 2017 by The Bank of Tokyo-Mitsubishi UFJ. Since then however the GPSG
appears to have been inactive - we can find no trace of it through Google search over the past
two years.

Ripple remains very wealthy from its sales of XRP and uses these funds, in part, for a variety of
charitable purposes including university funding to support research on distributed ledger
technologies.107 It also supports a variety of developments through xPring, its ‘ecosystem
initiative to build the internet of value’. 108 Ripple has supported a variety of xPring technology
initiatives investing (through transfer of XRP some $500 million) in 20 firms over the last year to
augment use cases for its blockchain based token XRP (ledgerinsights 2019). In addition some
$100 million has been invested in gaming related technology (Ledgerinsights 2019b).

As described below, Ripple offers a suite of solutions (“RippleNet”) for executing international
payments, employing distributed ledger technologies and APIs (application programming
interfaces). Ripple’s product offerings have attracted considerable interest from commercial
banks and other institutions worldwide. The number of countries through which xCurrent

104
These fundraising are detailed in Wikipedia https://en.wikipedia.org/wiki/Ripple_Labs
105
Documented in (Crossman 2019)
106
In a Ripple press release (Ripple 2016a; Treacher 2016)
107
$50mn has been announced as support for leading universities. One recent example resources to University of
Sao Paulo, and Fundação Getulio Vargas business school to support research in engineering, business and law. The
firm suggests academia will push Blockchain forward (Coindesk 2019d).
108
As it is described on the xPring webpages (Ripple 2019).

49
transfers may be made is increasing.109 As of early 2019 Ripple was reported to have more than
200 institutions using its xCurrent service. Application of Ripple by Santander has received
particular prominent press coverage. 110 Many of these participating institutions though are not
commercial banks, instead they are themselves FinTech start-ups seeking to provide low cost
remittance services and taking advantage of the greater visibility provided by xCurrent.111 The
number of commercial bank users appears to fall some way short of the number experimenting
with J.P.Morgan’s IIN or using SWIFT’s gpi.

Products
Ripple provides a suite of products, previously described as follows.

• xCurrent – for members of the Ripple network supporting their international payments
using distributed ledger technologies

• xVia – am API solution giving access to the Ripple network for other users enabling them
to send payments internationally

• xRapid – an advanced solution for members of the Ripple network, designed to provide
access to payment liquidity

Recent rebranding on their website has removed these labels. 112 They now refer to the first two,
collectively as ‘RippleNet’. The third has been rebranded as ‘On-Demand Liquidity’.

Ripple provides only limited documentation on the operation of these products. A five-minute
video was their official statement. We have transcribed the text, as amended to reflect the
rebranding of their products. This runs as follows.

“At Ripple we have talked a lot about the internet of value, our North Star of
enabling money to move like information does today. But how does the
internet of value translate into banking? It starts with your customers. Your
customer’s payment demands are changing and the internet of value plays a
large part on delivering on those demands. Across, retail, SMEs and corporate
customers, as well as the emerging wave of platform-based businesses, they
are demanding global transactions that are seamless, real-time, certain and
cost-effective. Yet today’s global transactions fall far short of those

109
An undated webpage (Ripple n.d.) describes xCurrent as providing international payment across 27 countries (it
is unclear how many of these are Eurozone countries and therefore essentially one from a payments perspective).
Numbers are though growing. In June, 2019, Ripple launched in Brazil, the first stage of expansion into South
America (Coindesk 2019e)
110
Santander launched One Pay FX in 2018, a Ripple-enabled mobile app for cross-border payments by their
customers using Ripple’s xCurrent., described in (Ripple 2018b). There are many other media reports of uptake of
Ripple services. MoneyTap app, a money transfer app has been launched in Japan. The app offer ability to make
bank-to-bank money transfers in real time also using Ripple’s xCurrent payment product. This service is able to
remit between accounts held at the three participating Japanese banks-SBI Sumishin Net Bank, Suruga Bank and
Resona Bank. Wihtin the last few months, the CEO of Ripple suggests that xCurrent system is now used by over
one hundred financial institutions.(Coindesk 2018c). Recently on November, 2018 MUFG bank subsidiary of Banco
MUFG Brasil signed a memorandum of understanding with Banco Bradesco to work on cross-border payment
service. They will be using Ripple’s technology for payments between Japan and Brazil.(Bankingtech 2018).
111
According to (Ripple 2018c) remittance service providers using xCurrent services now provide remittance
payments to over 40 countries across all six continents. Service providers include InstaReM and RationalFX to Asia,
Remitr and FlutterWave to Nigeria and BeeTecha and InstaRem servicing Brazil from Europe. Another example is
the CurrencyBird Reported in (Cointelegraph 2019a).
112
(Mitra 2019).

50
 expectations. That’s because the current payments infrastructure is a
patchwork of centralised networks, legacy technology and different payment
rails. It’s disparate. The technology, systems of record, messaging and rules are
different from one network to the next. Its slow, it takes an average of three to
five days to settle across the various intermediaries, its error prone failure rates
are high and data flow between intermediaries is poor, and its costly,
processing costs are high an average of between $20 and $25 for each
payment. The downstream impact of these problems provides a sub-par
customer experience that is driving customers from your bank to fintech
providers that can provide a better customer experience.

“We are solving this with RippleNet which is the cornerstone of enabling the
internet of value. RippleNet is a global decentralised network that brings
together a diverse ecosystem of payments players for the first time in history.
Let’s look at what could be the fully realised future state of RippleNet, starting
with the ecosystem of players who are categorised into two functional groups.
First are network users: these are corporates, SMEs, small banks and payment
providers who only send payments. Second are the network members. These
are banks and payments providers that serve as the foundation of the network
as they process payments and source liquidity. Network members process
payments through provides real-time settlement with bi-directional messaging.
With RippleNet banks and payment providers can process payments more
efficiently, through the pre-validation of every transaction to eliminate failures
and through rich data attachments for every payment. It also provides
certainty through the pre-disclosure of information prior to settlement to
eliminate failures and through atomic settlement that provides pass-fail
processing across all intermediaries to avoid settlement-like risk. Network
members can also source liquidity through a pool of on-demand liquidity
through digital assets. xRapid provides the ability to lower liquidity costs by
being able to source liquidity on demand and reduce the amount of nostros
required to make global payments. For network users, again these are
corporates, SMEs, small banks and other payment providers, RippleNet
provides a standardised API based interface to originate payments through
their banking partner. They can access across networks globally, they can send
payments on demand in real time, they can attach rich data like invoices to any
payment and they can gain complete visibility into payments status and
delivery timing. RippleNet is solving the inefficiencies of today’s payments
networks. It’s standardised, the technology, APIs and governance and
consistent across the network. It fast. The technology provides real-time
settlement and bi-directional messaging. It’s certain: atomic pass-fail
processing eliminates payment failures; and its high low-cost. High STP rates
and flexible liquidity provisioning lowers processing costs. RippleNet sf the first
step towards bring the internet of value to life through one frictionless
experience to send money globally. ” Author’s transcription of (Ripple 2018a)
made on Nov 20th, 2019.

This quotation from Ripple does a good job of explaining the problems with current international
payments. The description of their services is a little less clear. Particularly problematic is their
statement that RippleNet provides “real-time settlement”. As a general statement this must be
51
wrong – providing real-time settlement requires access to central bank money – either directly
holding accounts with central banks from both the sending and receiving country, or indirectly
through a correspondent bank (see our Figure 7) – but this is something which RippleNet does
provide.113

Also unclear is their discussion of ‘the internet of value’ and ‘liquidity provision’ and what added
value is obtained from their On-demand Liquidity service. We find it difficult to understand what
this means in practical terms. Discussion of liquidity needs to distinguish three quite separate
things (but not clearly distinguished in Ripple’s discussions of ‘On-demand liquidity’):

1. The liquidity needs of bank customers.

This is provided either through lines of credit from the bank or through customers holding
reserves of liquid assets, e.g. bank deposits, money market investments or short term securities.
Such lines of credit are needed to support international payments, and Ripples xCurrent service
can make more visible the need for short term credit to meet liquidity needs. But xRapid does
not enhance these liquidity services.

2. The liquidity needs of banks, providing payment services to customers

This is a matter of balance sheet management that has to be addressed at the level of the
institution as a whole. In the domestic context the liquidity challenge, now greatly constrained
by Basel 3 requirements, is to maintain sufficient high-quality liquid assets and access to
sufficient lines of credit from money markets to be confident of meeting any foreseeable outflow
of settled funds. For international payments the corresponding liquidity challenge is to balance
foreign exchange assets and liabilities and ensure they do not involve excessive maturity
mismatch. Ripple’s services, aimed as they are at the level of customer payment service, and not
providing an overview of a bank’s entire balance sheet, do not seem to address these bank
balance sheet liquidity issues

3. Liquidity in foreign exchange markets, where a foreign exchange settlement is required

to support an international payment

This is where Ripple’s On-Demand liquidity service seems to be most relevant. Banks must pay a
margin to exchange through foreign exchange dealers (as illustrated in our Figure 7. and 8.) and
large transactions can be even more costly because of adverse movement in the exchange rate.
The most widely used mechanism for avoiding such charges and market impact is netting of
offsetting flows. 114

113
None of Ripple’s own descriptions of their service accurately explain what it means to settle a payment (i.e. as
illustrated in our Figure 7, settlement meaning the corresponding transfers of bank reserves matching the transfer
of value from the customer sending money to the customer receiving money). An early example is (Ripple 2016b)
which claims demonstration of international payment settlement using the Ripple network in 8 seconds at a
payments conference in Calgary, whereas what they actually mean is that the payment was debited from one
account and credited to another within 8 seconds, without any reference to the corresponding settlement which
may take place subsequently after necessary foreign exchange transactions and movement within domestic
payment systems. We are aware of no subsequent fuller explanation of what they mean by settlement from
Ripple.
114
For some international payment ‘corridors’ i.e. direct flows in both directions between particular currencies,
foreign exchange flows in opposite directions largely cancel each other out. An example is international sterling-
euro payments, an important factor in the early success of Transferwise was that their initial core market sterling-
Euro exchange the customer orders in each direction were in approximate balance, they could net them off and
only occasionally needed to conduct a foreign exchange transaction. Source: private communication with
Transferwise management.

52
All of this is a little separate from settlement, the final exchange of value on the books of central
banks. Ripple clearly states that it seeks to supplant centralised networks through its ‘internet of
value’, but exactly how RippleNet’s provision of “On Demand liquidity” can replace the need to
access central bank money remains unclear.

Given this lack of clarity, we offer the following interpretation of Ripple’s services. We believe
they can be understood in terms of our Figures 8 and 9 above. We think the basic RippleNet
service is simply a limited re-engineering of the operations of international payments as in our
Figure 8 above.

The provision of full ‘On Demand liquidity’ goes much further, requiring a radical reengineering
corresponding to our Figure 9 above. The possibility of using their cryptocurrency XRP for foreign
exchange, on its own, would seem on the face of it to absorb rather than provide liquidity to
customers. This is because if involves moving from bilateral exchange in two currencies (e.g. $ to
Rupiah) to trilateral exchange in three currencies ($ to XRP to Rupiah). We can see thought that
this may work in the context of a radical reengineering of international payments, as illustrated
in our Figure 9. What they seem to have in mind is that RippleNet supplants the entire global
foreign exchange market, replacing the role of dealers in providing liquidity and price discovery
by direct ‘atomic’ or payer to payee transactions on the Ripple network; and also by operating
on a single global system maximising opportunities for offset netting on a multilateral rather
than bilateral basis, so minimising the need for settlement provided through direct access to
central bank balance sheets.

We think it unlikely that adoption of Ripple will be great enough to achieve this level of radical
transformation. This is though not at all to diminish the achievement of RippleNet as an early
initiative highlighting the opportunities for using technology, including distributed ledger
technologies, to automate international payments at lower cost and with greater reliability. How
widely used it will be though remains, to us, an open question.

Case studies: concluding summary

Referring back to Table 3, we highlight the main points we draw from these seven case studies

• These case studies provide fairly strong support for our view that it is the component
technologies of distributed ledger, not distributed ledgers per se, which is the principal
and most important development. Of the seven case studies only three are using a
distributed ledger and only one – Ripple – is even attempting to develop a distributed
financial ecosystem in which the role of current intermediaries is displaced by more direct
‘peer to peer’ transactions.

• Many of these describe themselves as ‘distributed ledgers’, but distributed ledger means
different things in these different business contexts. For the two applications of
Distributed Assets DAML language, both supporting services for the ASX replacement and
for the ISDA common domain model CDM, this is a reference to automated processing in
which agreement on shared data and definitions of processing events is key. These
automations do not need a distributed data ledger without a single operator.

• The full impact of these developments requires both co-operation and time: the

53
 perception that distributed ledger is a disruptive innovation that will sweep aside existing
practice receives virtually no support from our case studies. WE have discussed one
possibility, that of RippleNet replacing the conventional architecture of foreign exchange,
but this while it is a fascinating prospect is in our judgement not realistic. We also see
the possibility of the widespread adoption of Fnality’s USC leading to dramatic
transformation of international payments, but this will be a process of change taking
some years, not overnight revolution.

• Overall the impact of ongoing digitisation of financial services will be profound, but this
is a gradual evolution over years, not a sudden revolution. Moreover a focus on
‘distributed ledger’ or blockchain is, if anything, a distraction from the key issues.

54
4 Distributed ledgers: the adoption decision
This section discusses the decisions involved in adoption of distributed. This discussion
supports two main findings:

(i) Adoption of a distributed ledger is most appropriate in situations requiring shared

multiparty governance of data and data access.
(ii) In digitizing operational processes and systems, using a distributed ledger or
another approach, it is necessary to address familiar and difficult challenges of data
quality, data governance and data management. Potentially substantial costs of
changing operational processes cannot be avoided.

This section reviews a range of opportunities for sharing the storage and processing of data
records amongst multiple users in financial services. We ask: where amongst these potential
opportunities for applying distributed ledger technologies are the trade-offs between costs and
benefits of adoption appear most favourable and hence where, across the full range of financial
services, are distributed ledgers more likely to be first and most fully adopted?

This discussion draws on several sources. First our own understanding of the operational and
business processes involved in these many different financial services. Second, our analysis of
announced financial distributed ledger projects in Appendix A to our paper. 115 Third a wide-
ranging desk review of commentary on distributed ledger technologies.

4.1 The benefits of distributed ledger technologies

Bold claims are routinely and widely made for the benefits that can flow from employing
distributed ledgers in both business and public administration, prompted in part by the
investment frenzy over cryptocurrencies.116 Discussion of these benefits is hampered by a huge
amount of low quality online material, mostly copied uncritically from other online sources.117

115
This list of 124 distributed ledger (or ‘blockchain’) projects contains all the initiatives in mainstream financial
services that we could find, announced in the course of three and a half years between September 2015 and April
2018. Most of these are exploratory ‘proofs of concept’, with little detail in the public domain about what was
actually done, and only a few have been taken forward beyond the proof of concept stage. Still together, they give
an indication of the wide range of interest in developing distributed ledger solutions for financial services.
116
Some examples amongst many “Distributed ledger technologies (DLTs) have disruptive potential beyond
innovation in products, services, revenue streams and operating systems within existing industry frameworks.
They have the potential to disrupt the whole economy, and society.” (Government Office for Science 2016 pg 53)
“Quite simply, we believe that blockchain will do for business what the internet did for communication.” (IBM
2018 pg 5). “Blockchain technology has the theoretical capacity to apply to and disrupt any form of value or data
transfer recorded in a ledger.” (Casey et al. 2018 pg 13).
117
There are exceptions, e.g. ‘The Great Wall of Numbers” the blog of Tim Swanson (Swanson, n.d.) provides
reliable, carefully considered independent analysis of distributed ledgers and related technologies..

55
There is a vast amount of nonsense. 118 Claims demonstrated to be false continue to circulate,
until they become accepted by dint of repetition.119

Despite all this noise, distributed ledger technologies can deliver many substantial benefits.120
These benefits are usefully separated into two broad groups: (i) data management benefits,
when holding and sharing data of any form (ii) transaction efficiency benefits, when using ledgers
to hold records of ownership and financial obligations.

Data management benefits

(i) Shared secure permanent records of data amongst a network of users

These is a fundamental benefit of distributed ledger technologies. The sharing of the ledger,
with several operators confirming the eligibility of user requests and then updating the records,
is essentially more secure than a system relying on a single shared database. A hacker who
managed to break into the systems of one operator could attempt to make unauthorized
changes in the ledger. But unless they penetrated the systems of many operators, these
changes cannot be accepted. The structure of the ledger, with no data records ever
overwritten, ensures permanency.

(ii) Data transparency: with full control over access to data records

The original Bitcoin blockchain is completely open – anyone can download the complete record
of past transactions. Several websites use this feature to provide a wealth of derived data on
transactions and Bitcoin ‘mining’ that go right back to when Bitcoin was first traded in 2009.121

Such complete openness is not appropriate for the permissioned distributed ledgers applied in
business and public administration. But the fact that these ledgers are permissioned and
operated using a single shared software allows precisely tailored control over what data
records can be read and by which users. Moreover, these permissions are themselves
transparent. All users can see who is able to read the data they have provided to the ledger.

(iii) Data provenance: a complete audit trail of changes to the ledger and support for dispute
resolution

118
One example: (Gupta 2018) appears reputable because it is published by IBM and Wiley. It is not reliable.
Errors include: (i) “One solution that’s been developed to address the complexities, vulnerabilities, inefficiencies,
and costs of current transaction systems is Bitcoin” (false, Bitcoin is far more expensive and inefficient); (ii) “For
example, blockchain enables securities to be settled in minutes instead of days.” (false, conventional technology
can also support immediate ‘real time’ settlement, as it does already for large value cash payments; delay in
settlement is a design feature in security markets allowing traders time to locate the cash and securities for
settlement of trades (Mainelli and Milne 2016)); (iii) “Blockchain enhances trust across a business network. It’s not
that you can’t trust those whom you conduct business with; it’s that you don’t need to when operating on a
blockchain network.” (overstated, only applies for data not introduced from outside the ledger, conventional
institutional arrangements of internal corporate control and of external law and regulation are still needed to
ensure accuracy of external data imported into the ledger, see further discussion below);
119
For example, the 2015 claim that Honduras, one of the poorest countries in Latin America, had adopted
distributed ledger for land registration and that similar adoption of distributed ledger for land registration could
help lift low income countries out of poverty. This myth was disposed of in 2016 (see Cadasta Foundation 2016 for
detail: uncertainty of title in Honduras and other low income countries is due to failure to survey land and agree
title not inadequate record keeping technology) but yet still regularly re-appears (e.g. Kshetri 2018)
120
The following analysis is our own, identifying various benefits culled from many sources (including IBM 2018;
M. Casey et al. 2018; Rauchs et al. 2018; Forrester 2018) and assembling them into our own categorization.
121
For example https://www.blockchain.com/charts

56
Because records are only added, never removed, distributed ledgers provide a complete record
of past changes of data on the ledger and of who instructed these changes. In this sense data
provenance is known (though provenance of data from outside the ledger is not automatically
established). This in turn reduces possibility of dispute about the data records.

(iv) Simplified data operations: supporting automation and reducing operational risk.

Once users agree on sharing data through a ledger, this ensures consistency of data for
different users, a ‘single source of truth’. This consistency can then support greater automation
and reduced need for costly manual intervention, in for example reconciling invoice or
transaction data before fulfilling payment and transfer obligations, and reduces delay or
mistakes in data operations

Efficiency Benefits in Financial Transactions

(v) Reducing operational cost and risk

This is the most widely promoted benefit from moving the records of asset ownership and of
financial contracts onto a distributed ledger. Provided that both the contracts and the cash or
investment assets they refer to are all recorded on the same ledger, then operations can be
carried out automatically with lower cost and with lower operational risks. The catch is the word
‘all’: in practice it can be difficult to have every aspect of the ownership or financial contract
captured on one ledger.

(vi) Reducing uncertainty through automated pre-commitment to asset transfers on the

ledger through ‘smart contracts’.

‘Smart contracts’ are code on the ledger that self-execute to update data records on the ledger,
when specified conditions are satisfied (“If …. then ….”). 122 This feature can help build trust in
the obligations of other participants. For example, payment in a supply chain can be triggered
automatically without having to go through the slow and uncertain process of issuing an invoice
and awaiting payment, once fulfilment of the supply contract is confirmed.

(vii) Removal or simplification of layers of financial intermediation, leading to

increased competition and lower charges to final customers

Modern financial services are characterized by multiple layers of intermediation. An example is

chain of intermediation supporting investment in securities investment (investor – pension fund,
bank or retail broker – fund manager –– custodian – depository – issuer). Other complex chains
of intermediation appear in commercial banking and in insurance. Each link in these chains

122
The label ‘smart contracts’ is a misnomer. They are more accurately labelled ‘dumb contracts’ because no
intelligence, learning or human intervention is involved in their initiation or execution. Potentially some forms of
artificial intelligence software could be used together with a distributed ledger to initiate request for the
execution of financial transaction, but this is not what is currently understood by the term ‘smart contracts’.

57
applies their own charges. These charges are opaque and contribute substantially to overall
customer costs. 123

Data management using distributed ledger technologies could allow major simplification in the
recording of investments, transactions and financial contracts. This could in turn remove the
opaqueness of charges and support greater competition and, potentially, consolidation or
elimination of the different stages of intermediation.

(viii) Overall reduction in transaction costs, supporting innovation in financial services

and promoting financial inclusion

Many of the ‘good news’ stories about distributed ledgers are about their potential use in
meeting currently unmet needs for financial services or reducing substantially high levels of
charges imposed on the vulnerable or excluded. There is a widespread problem of, high
contractual and transaction costs, relative to the size of the financial obligations and transactions
of lower income, resulting in high charges or the failure in market provision of a financial services
at all. In principal the use of distributed ledger technologies to support data transparency and
reduce the costs of financial transactions should promote the development of new financial
services and financial inclusion.124

These benefits are widely recognized and widely discussed. What is not so widely recognized is
that (as we discuss in the next section) the realization of these benefits does not require the
adoption of a complete distributed ledger solution. These benefits are the benefits of digitizing
of data operations and they can also be achieved using conventional databases each maintained
by a single operating entity. The perception that a distributed ledger is necessary in order to
achieve these benefits is false; but several of component technologies employed in distributed
ledgers can be used to help achieve the benefits of digitisation.

One related DL myth is that these new technologies achieve efficiency in processing, with for
example DLT providing “through put” efficiency gains by eliminating hierarchies of financial
intermediation. This is putting the cart before the horse. The simplification of hierarchies of
financial intermediation may support greater efficiency of processing, but this is delivered by the
structural change itself not by the supporting database technology. It is a secondary question
whether such change is best implemented using DLT.

Having multiple operators of a single distributed ledger has advantages. As we have noted it is
more secure and it avoids users relying on a single entity that may not always act in their interest.
But it also introduces additional costs of system change and of collective ledger governance. It is
therefore unsurprising that, as we find, in practice fully distributed ledgers with no central
organization responsible for updating records are being adopted only in a few specific contexts
where the balance of costs and benefits favours their adoption.

123
Lack of transparency in asset management makes it impossible to establish charges precisely (Pitt-Watson et al.
2014); but in UK equity fund management hidden charges are said to add an additional 1.4% to the already high
disclosed total expenses of 1.7% (according to a 2011 report by Christopher Sier cited in Powell 2016).
124
See e.g. (Gallo, Jumamil, and Aranyawat 2017; Kewell, Adams, and Parry 2017).

58
4.2 Costs and benefits of adoption

Adoption is a cost-benefit decision. Table 5 summarizes the costs and benefits. Overall this
suggests there can be substantial barriers to adoption.

Table 4: the benefits and costs of DL adoption in financial services

Benefits
• Data management benefits from shared common data
• Low cost rapid execution of financial transactions with immediate finality;
• Reduced uncertainty through automated pre-commitment to payments or other asset
transfers through ‘smart contracts’;
• Removal or simplification of layers of financial intermediation, leading to increased
competition and lower charges to final customers;
• Overall reduction in transaction costs, supporting innovation in financial services and
promoting financial inclusion.
Additional Social Benefits
• Improved regulatory oversight as data is moved onto distributed ledgers
• Reduced systemic risk from failure of centralized institutions
Private Costs
• Reengineering of business processes in order to participate in the ledger
• Costs of governance: both the costs of participation in governance and the potential
costs of being obliged to comply with adverse collective decisions
• Falling business margins as new competitors take advantage of the transparency of
the ledger to compete in core business activities
Note. The costs listed in this table do not include the high resource costs and slow speed of confirming
transactions in cryptocurrency ledgers. The table is designed for assessing commercial applications of distributed
ledgers, where real world identities are known. As a result, the operational inefficiencies of ‘proof of work’ –
which arise because real world identities are unknown – do not need to be considered.

Operational costs in global capital markets are substantial – though we know of no credible
breakdown of those costs between those associated with long term equity investment and
short term proprietary trading or between different categories of security, derivative and
foreign exchange transactions. 125 Distributed ledger technologies could achieve substantial
reduction, but exactly in what way and how large are the resulting benefits is still unclear.

There are also major barriers to adoption. There are not yet clear positive return to investment
(RoI) in most areas of financial services. 126 Network effects can make it difficult for challengers
to employ distributed ledgers to disrupt existing business models. Simplifying layers of
intermediation and increased competition lowers margins and profits. Where adoption is a
collective decision (where there is no ‘first mover’ advantage as can often be the case in
network industries) then losers may block technical innovation. 127

125
According to Oliver Wyman the aggregate revenues of the capital markets firms servicing the specific activities
that can directly utilise mutual distributed ledger – clearing, securities settlement, collateral management and
custodian services – together amount to some $40bn to $45bn (cited in Mainelli and Milne 2016).
126
See (Crossman 2018)
127
A common them in the economics of financial infrastructure, see (Milne 2006; Milne 2007)

59
4.3 Radical versus limited adoption
Adoption is a matter of degree. To illustrate consider equity ownership and trading (Figure 2)

Figure 10: The current hierarchy of ownership in a trading environment.

Buyer (asset manager, cash only Seller (asset manager, cash only
institution such as an insurance fund or a institution such as an insurance fund or a
leveraged institution such as a hedge leveraged institution such as a hedge
fund) fund)
Investment accounts Trading Trading Investment accounts
accounts accounts
Cash and security Security Security Cash and security
accounts with Accounts with accounts with accounts with
Commercial Security Security Commercial
Bank/Custodian Broker Broker Bank/Custodian

Cash and security Cash and security

accounts with Central Security Security accounts with Central
Bank/CSD accounts with accounts with Bank/CSD
CSD CSD
Note: Adapted from Figure 3 of (Milne 2015) The ownership of both cash and securities is in a tiered hierarchy.
Cash is held in accounts with commercial banks who in turn hold reserve accounts for settlement of cash transfers
with a central bank. Similarly, investors hold security accounts with custodian banks who in turn hold so called
‘omnibus’ accounts with central securities depositories or CSD (for example Euroclear UK and Ireland in London
Markets or DTCC in US markets). The key difference is that cash accounts held at commercial banks accounts are
fractionally reserved, so there is no need for them to be backed 1:1 with reserves at the central banks; custodian
banks on the other hand must match the total held in omnibus security accounts with the total of their client
accounts i.e. they are fully reserved. This allows the CSD to keep the ultimate record of issued equities or bonds.

Beginning from this starting point, who might benefit from sharing moving records of equity
ownership on distributed ledgers? Potential beneficiaries include ‘buy side’ institutions, notably
asset managers whose funds under management account for the large majority of securities
investments (but there are many other buy side participants as well, ranging from retail
investors to hedge funds). Also, in the context of the clearing and settlement of securities
transactions, beneficiaries may also include the brokers who execute transactions on behalf of
buy side clients. How might they benefit?

This depends on how a distributed ledger is employed. We distinguish two illustrative

possibilities, for altering Figure 10 (variations of these are possible):

1. (Radical re-engineering) Moving all records of cash and security ownership in a given
jurisdiction (US, UK) onto a single distributed ledger (Figure 11).

Such radical re-engineering is conceivable. This seems to be what commentators promoting the
transformative impact of distributed ledger on financial services have in mind, for example
those claiming the transparency of distributed ledgers can substantially improve corporate

60
governance.128 There have been practical experiments with ‘issuance of securities on a
blockchain’, exploring the legal and operational issues involved in moving the ultimate records
of securities holdings out of CSDs/ Custodian Banks onto a distributed ledger, so this is
technically feasible. 129

Figure 11: Radical re-engineering of asset ownership using distributed ledgers

Buyer (asset manager, cash only Seller (asset manager, cash only
institution such as an insurance fund or a institution such as an insurance fund or a
leveraged institution such as a hedge leveraged institution such as a hedge
fund) fund)
Security accounts Cash accounts Security accounts Cash accounts
Security accounts Cash accounts on Security accounts Cash accounts on
on single single distributed on single single distributed
distributed ledger ledger distributed ledger ledger

Proof of concept, showing that all the various transfer and corporate action operations involved
in securities transactions and security investments can be carried out on a distributed ledger,
demonstrates only that such radical re-engineering is feasible not that it is desirable. Making
the case for radical reengineering requires also demonstrating that the benefits in terms of
lower operational costs and risks and greater transparency justify the costs of systems
migration.

Compare this clear and specific benefit to individual adopters with the more uncertain benefits
of radical change illustrated by Figure 3. It is difficult to assess what operational cost reductions
would follow from moving ultimate records of equity ownership onto distributed ledger. The
major custodians already benefit from substantial economies of scale. While substantial
reduction in operational costs, especially those associated with reconciliation of data from
multiple sources, could be achieved by shifting securities from the half a dozen institutions that
account for the bulk of custody assets onto a single ledger, it is unclear that other approaches
– for example standardization of data fields could not achieve much the same outcome.
Custodians will still continue to supply tax, corporate actions and portfolio information services

This is not to argue that benefits of radical change illustrated by Figure 3 are small.
• Buy-side participants in security markets could benefit from much lower operational
costs and greater competition in custodian services, from holding assets on a single
distributed ledger rather than with a range of custodian banks. 130 Standardization would
128
See (Yermack 2017) pg 2: “Perhaps most importantly, blockchains could provide unprecedented transparency
to allow investors to identify the ownership positions of debt and equity investors (including the firms’ managers)
and reduce the opportunity for rent-seeking or corrupt behaviour ….” This seems overstated. Putting ownership
on distributed ledger would not, of itself, ensure transparency of ownership without some ex-ledger mechanism
to force investors to reveal the identity of ultimate beneficiaries, i.e. a broader institutional shift towards
transparency of ownership in global securities market. Yermack also argues that investors will benefit from
holding securities on distributed ledger because this will support greater liquidity in securities trading, but this also
is unclear since it does not obviously change market and credit risks.
129
For example the bond issuance reported in (Cohen et al. 2018)
130
(Powell and Hobson 2018) use cost and revenue data for the six largest global custodian banks (acknowledging
considerable uncertainty in their estimates) to support a judgement that universal adoption of distributed ledgers
would reduce the costs of these custodians by $6bn per year and reduce their revenues by $13bn per year. This
does not take account of dynamic competition effects, which could further reduce their margins.

61
 make it easier to compare and switch between custodian banks, encouraging greater
competition and innovation in custodian services. This though underlines a key
challenge: achieving critical mass. A distributed ledger competitor to custodian banks
with low uptake would not have the economies of scale to compete effectively with
incumbent custodians in terms of either cost or service quality, but without a compelling
business case in terms of better cost of service quality few asset managers will transfer
asset holdings from the custodian to the distributed ledger.

• Operational cost reductions would be particularly large for international investment,

which must rely today on the relatively cumbersome processes, either of issue of a
depository receipt in an overseas equity market or of an overseas custodian employing
a sub-custodian in a domestic market. Having all equity ownership on open distributed
ledger could support direct international ownership without these additional layers of
intermediation.

• Equity trades in the major financial centres are guaranteed by central counterparties,
to maintain trading anonymity; to maximize netting; and to minimize the impact of
trade settlement delays. The employment of distributed ledgers, managed by the
central counterparty but open to external monitoring and governance alongside a cash
distributed ledger similar to that supported by utility settlement coin, could minimize
the systemic risk associated with these centralized infrastructures.

Unlike the case of utility settlement coin however, these are all social not private benefits.131
The relatively low private benefits from such a major change in the architecture of global
financial markets suggests that, however desirable, this cannot come from private initiative
alone. If it is worthwhile (and this would be controversial) then it will have to be mandated by
regulators or result from a collective agreement amongst buy-side clients. We return to this
possibility in our discussion of public policy in Section 6.

Turning to a more limited possibility of reform in equity holdings and transactions, we might
have:

2. (Limited application in security transactions) Operating distributed ledgers alongside

the existing arrangements for investment, with security and cash ownership
transferred onto a distributed leger for trading purposes but not for investment
(Figure 12).

131
As (Powell and Hobson 2018) make clear custodian banks appear likely to lose not gain from radical adoption.

62
 Figure 12: Distributed ledger limited to security transactions
Buyer (asset manager, cash only Seller (asset manager, cash only
institution such as an insurance fund or a institution such as an insurance fund or a
leveraged institution such as a hedge leveraged institution such as a hedge
fund) fund)
Investment accounts Trading Trading Investment accounts
accounts accounts
Cash and security Cash and Cash and Cash and security
accounts with security security accounts with
Commercial accounts on accounts on Commercial
Bank/Custodian distributed distributed Bank/Custodian
ledger ledger

Cash and security Cash and security

accounts with Central Cash and Cash and accounts with Central
Bank/CSD security security Bank/CSD
accounts with accounts with
Central Central
Bank/CSD Bank/CSD

Such an arrangement would require similar movements of cash and securities required for
cross-border securities trading in the EU through the Target-2 securities settlement system
platform sponsored by the European Central Bank. 132 In order for a security to be traded
between two EU jurisdictions, the investor or their representative must have cash accounts
with the central bank (Target 2) and also securities accounts with the shared platform (Target
2 securities). Once the cash and securities are in position, the two platforms ensure
simultaneous delivery against payment (DVP) to settle the trade. So, prior to trade the
investor’s holdings of cash and securities must move, from commercial banks/ custodians
investor accounts onto trading accounts (held via the ledger in Figure 4 or directly with the
central bank/ CSD for current Euro area trading). There is a difference: the distributed ledger
security accounts in Figure 4, would be held directly by investors not by brokers.

4.4 Distributed ledgers: not necessary to delivering all their perceived benefits
Distributed ledgers offer substantial perceived benefits through both improvement of data
management and reduced costs of financial transactions (benefits (i)-(viii) listed in Section 2).
Amidst all the excitement about distributed ledgers, it should though be recognized that
distributed ledgers are just one implementation of modern information, communication and
data technologies that might be used to realize these benefits.133

As we have seen, distributed ledgers are a means of sharing of secure permanent records of
all data amongst a network of users. This directly delivers benefit (i). The reduced costs and
uncertainties in operational processes i.e. benefits (ii)-(viii) are not a direct consequence of the
adoption of distributed ledgers. They are the result of the associated digitisation of operational

132
https://www.ecb.europa.eu/paym/target/t2s/html/index.en.html
133
As one commentator on an early draft suggested, distributed ledgers are a “mash-up” of component
technologies.

63
processes. Digital ledgers may require this digitisation but they are not necessary for achieving
it.

How else might these other benefits be achieved without distributed ledgers? Benefits (ii) data
transparency and (iii) data provenance are based on applying modern tools of cryptographic
security. These can be applied to conventional database. They do not require a distributed
ledger. It is true that the required transparency may be more easily implemented within a
single software, but modern technologies, especially the use of application programming
interfaces or APIs can support the retrieval of required data from range existing systems,
provided there is sufficient comparability of underlying data. Data provenance is more difficult
since the underlying systems may not record all the required information to trace the source
of data, but still a complete replacement of an existing system with a distributed ledger may
not be necessary.

Benefit (iv) – that of simplified data operations supporting automation and reducing
operational risks – is largely a standardization challenge. When individual firms or government
bodies use their own separate identifiers, classifications and data typologies in their own
systems, then there will difficulties in automated processing of shared data. Even within
individual institutions it is all too common to find incompatible systems and great difficulties
with internal sharing of data at the granular level. A promising technology for sharing of data
without replacing legacy systems are again application processing interfaces or APIs – but
these depends on a minimum degree of comparability of identifiers, classifications and data
typologies used in different systems. 134

Turning to the more specific benefits of greater efficiency in financial transactions, none of
these depend on employment of distributed ledgers. Benefit (v) low cost rapid execution of
financial transactions can already be offered for both cash and securities recorded in
conventional databases without employing any of the technologies used in distributed ledgers.
There are several reasons why is not always already done.
• As already discussed, this is a deliberate feature for example in securities settlement
providing counterparties with time to position for final settlement.
• It may be a consequence of legacy processes – for example for salary payments - that
rely on batch processing. These processes are deeply embedded in the systems of
both financial institutions and their customers. Introducing a distributed ledger will
not change them and these can be changed without a distributed ledger.
• It may be a consequence of errors in input and exchange of transactions data that
require checking and if necessary manual correction before a transaction can be
completed. Automation of these operations requires changing the operational
processes for inputting of data, but this is again something which could be done
without a distributed ledger.

Moving all ownership onto a distributed ledger, with accompanying changes in legacy
processes and in input and exchange of transactions data would then allow low cost rapid
execution. But these changes do not necessarily require such a complete data migration.

134
Financial services have generally co-operated quite well on establishing communication standards, with SWIFT
playing a leading role, but have a much weaker record on development of data standards such as identifiers or
consistent typologies (Houstoun, Milne, and Parboteeah 2015; Alistair Milne and Parboteeah 2015).

64
Similarly, benefit (vi) the use of ‘smart contracts’ to provide pre-commitment to fulfilment of
financial obligations, could be provided from conventional databases supported by
appropriate tools of data transparency and standardized definitions. Once again, a distributed
ledger is not required to achieve this benefit.

There must be even greater doubts as to whether the more far reaching efficiency benefits
claimed for applying distributed ledgers in financial transactions, i.e. benefits (vii) and (viii),
are achievable through the adoption of distributed ledgers alone. The reasons for such
complex and opaque chains of financial intermediation are as much institutional as technical.
There are substantial network effects which make it difficult to establish new platforms or
markets. Extensive regulation means that any operational innovation, including participation
in distributed ledgers, is usually forced to align closely with existing business models.

Similarly, the high costs and limited provision of financial services to poorer and more
vulnerable households, especially in middle- and low-income countries, are not easily
corrected using distributed ledgers. These reflect a range of factors, including reliance on cash
transactions without the transaction histories that can support credit or insurance and also
weaknesses in information and legal infrastructures that would support the provision of
financial services.

Yes, more transparent and simpler arrangements could be developed in which distributed
ledgers might play a role. But such changes in systems incur considerable costs and risks to
incumbents, are a major coordination challenge and could face resistance from some
incumbents whose margins and business models are threatened. As we discuss below in
Section 6, such fundamental change is likely to require state direction or compulsion.

4.5 Shared multiparty versus single party governance

We briefly discuss the choice between a database with many operators and shared governance
(hence falling under our Definition 1 of a distributed ledger) and the more conventional choice
of a database with a single operator and hence either representative governance representing
various stakeholders or single party governance.

All databases, whether conventional or a distributed ledger, must ensure the consistency,
accuracy and security of their data, with data available as needed to support business and
administrative functions. Sometimes these ends will be better served by having limited access
and a single entity responsible for maintaining the database (conventional database design)
and sometimes collaboration amongst multiple users and entities (distributed ledger). 135 The
choice is context dependent: it depends on the trade-off of between (i) the benefits of reduced
reliance on a third parties, agreed standards and more open access; and (ii) the costs of
investment in new shared systems and of collective governance and standard setting.

135
A familiar example of data sharing relying on a single entity are what are referred to as global distribution
systems (or GDS) in the terminology of the airline industry, developed in the 1990s for sharing flight reservation
data amongst airlines and travel agents, for example Amadeus, Galileo International and Sabre; these GDS
capture, combine and maintain mirror records of reservation data held by the individual airline’s computer
reservation system (see Buhalis 2004 for review of how these and internet bookings have impacted the airline
industry).

65
This perspective is reflected in the following advice offered by IBM on the adoption of
distributed ledgers, (because of their practical experience in advising on the implementation
of distributed ledgers, this is well worth quoting; note that they use the label blockchain where
we prefer distributed ledger).

“There are four key questions in evaluating the need for blockchain; they can uncover
how closely your use case aligns with the purpose and value proposition of blockchain
itself.
“1. Does the solution require trusted data to be shared across multiple parties without
a central authority? The fundamental value of blockchain lies in its shared ledger, an
append-only distributed system of record across a business network. If a use case
doesn’t require a shared ledger and a network of participants, blockchain technology
probably shouldn’t be used….
“2. Are assets being transferred between parties? At its core, a blockchain solution
should manage the transfer of anything with tangible or intangible value. Assets can
be physical ones like a piece of fruit; digital like an electronic file or data, or intangible
like a letter of credit or contract. Blockchain is used to record the transaction of these
assets between multiple parties in a business ecosystem; without asset transactions,
you’re likely better served by a traditional database.
“3. Is there a need for privacy among participants in the current business network?
One thing that separates permissioned blockchain from traditional distributed
databases and some cryptocurrency-based blockchains, such as Bitcoin, is its ability to
permission the data. Participants can transact privately across the network to ensure
that confidential information is not broadcast. Their identities won’t be linked to the
transaction either, further ensuring their confidentiality.
“4. Is there the need for greater trust inside the current business network? Heavy
regulation and frequent audits are typically a strong indicator of distrust within an
industry. Because blockchain assets have a verifiable audit trail and cannot be
modified, inserted or deleted, the network’s shared ledger becomes the trusted source
of information for all parties. Transactions are also electronically endorsed on a case-
by-case basis by mutually-selected members of the business network, fortifying trust
even further.” (IBM 2018 pg 9)

While agreeing with this advice, we would suggest even greater caution than these IBM
recommendations on adoption of distributed ledger for digitisation of operational processes:
(i) Even if trusted data must be shared (IBM’s question 1) it must still be asked if this best
done with or without a central authority or repository. A key question here is
governance (the top layer of our database ‘stack’): are the additional costs of shared
governance arrangements justified?
(ii) We already have many systems for recording and transferring of financial and other
assets (IBM’s question 2). So here, the key question is whether these already exist and
whether the costs of introducing a distributed ledger sufficiently improves these
systems.
(iii) Privacy (IBM’s question 3) can be achieved in conventional databases using modern
tools of cryptographic security. As we have already discussed this is not itself a reason
for using a distributed ledger.
(iv) Trust in data (IBM’s question 4) may be achieved more directly, using other approaches,
promoting open data access, greater technical standardization and automated data
exchange.
66
A further key issue is governance of shared data. A distributed ledger may be appropriate when
participants in the ledger are disadvantaged by relying on a single entity to operate the ledger
and either controlling or having excessive influence over the governance and software layers
of the database. Otherwise the benefits of distributed ledgers are more appropriately pursued
by digitisation with data shared through a single entity not a distributed ledger.

4.6 The challenges of data management.

Digitisation of operational processes – whether this is undertaken to support the adoption of a
distributed ledger or not – requires addressing a range of all too familiar and all too often messy
issues of data management. The collective effort to adopt a distributed ledger can support
automation and improve operational efficiency; but they are not a ‘magic bullet’ for solving
underlying data problems. 136

The need for external data interfaces

A principal reason is that any application of distributed ledgers in business and public
administration require external data interfaces i.e. data that is either imported (an incoming
data interface) or exported (an outgoing data interface). 137 The exception are the original
blockchains supporting Bitcoin and other crypto assets. Their only purpose is secure transfer of
a native asset within their network and so do not require any external data interface. This
limited application means that the ledger can work on a permissionless basis with the software
alone ensuring data integrity. 138 But this does not generalize to other applications.

As an example of data import, consider a distributed ledger developed to provide supply chain
transparency and authenticate product origin. In order to use a distributed ledger to verify the
origin of, say, a particular artisan cheese, the identity of the data provider has to be known for
checking data accuracy and penalizing inaccuracy.

For data export, consider the use of distributed ledger to record the holding of securities such
as bonds or equities. Corporate actions on these security holdings, such as payment of coupon
or dividends or proxy voting at annual meetings, requires knowing real world identities of
holders of ledger assets.

The requirement for distributed ledgers to be based on real world identities is reinforced by
the application of financial regulation, such KYC/AML requirements, customer protection and

136
For example it is commonly asserted that business process and technical standardization is a key to digital
automation (we agree) and that DL together interoperability between DLs and existing systems will deliver this
desired outcome (we disagree, it is the other way around, there is no easy route to adoption of agreed business
process and technical standards but these are required in order to obtain the benefits of DL).
137
For related analysis see (Rauchs et al. 2018) especially their landscape map (Figure 25) comparing distributed
ledgers along two dimensions: (i) ledgers where data is entirely endogenous and does not exist outside of the
network (i.e. no external interface) vs. ledgers with exogenous data generated from outside the network (i.e. with
an incoming data interface); and (ii) the degree of centralization (from centralized, through semi-centralized to
decentralized). They show that distributed ledgers without external interfaces are typically ‘unpermissioned’
(anyone can join) and fully decentralized; while distributed ledgers with an incoming data interface are typically
‘permissioned’ (there are restrictions on joining) and only partially decentralized.
138
This data consists of the amounts of assets involved in each transfer together with matching public and private
keys. (Narayanan et al. 2016) provide detailed description. The holder of a private key can receive a transfer to the
corresponding public key and then, subsequently, initiate the further transfer of that asset holding using the
corresponding private key. Since all data is internal to the network, the keys need not be linked to real-world
identities and the network can be open to anyone without identification or other requirements.

67
securities regulations for investor protection. As we discuss later in this section, crypto asset
ledgers brought within the ambit of these financial regulations will also need to employ real
world identities.

Adoption requires addressing a range of related data management issues.

Because practical business and administrative application of distributed ledgers requires
external data interfaces, they cannot avoid dealing with a range of familiar data management
concerns. Over the past two decades, data management (previously viewed as a narrow
information systems responsibility) has become a central strategic concern in both business
and public administration. Many large companies, including most large financial services firms,
now have a chief data officer. Most have developed explicit data strategies, with goals such as:
reducing costs of internal data management through greater automation; ensuring that a firm’s
data is viewed as an asset and exploited effectively for commercial advantage; and maintaining
the security of data and compliance with regulation such as the EU General Data Protection
Regulation GDPR.

This perspective has been reinforced by the growing perception of the need to take advantage
of the opportunities from ‘big data’ i.e. the increasing availability of digitized data from the
internet and from internal information systems, which continue to grow rapidly in volume,
variety and velocity. 139

Internal data in organizations is typically fragmented and of uncertain quality, posing

substantial management challenges even when this data is not shared with others.140 While
these problems of data fragmentation and data quality may sometimes be usefully addressed
using distributed ledgers, they do not then go away. Having agreed to share data through a
ledger, users need to more explicitly and consciously address data management than before,
rather than leaving it to ad hoc solutions at lower levels of their organizations. Placing internal
data into any form of distributed ledger for sharing with multiple users on a commercial scale
is therefore not something to be done lightly.

Distributed ledgers support, do not replace, data governance

139
Originating in analysis by the technology consultancy Gartner, these three ‘Vs’ of volume, velocity and variety
are broadly accepted as the defining characteristics of big data. Many commentators e.g. (Corrigan 2013; Chessell
et al. 2014) add a fourth V ‘Veracity’ though this is more a challenge than a characteristic. (Ward and Barker 2013)
survey the range of different definitions of ‘Big Data’.
140
This judgement is based on a brief look at some of the business handbooks and reviews for practitioners,
drawing on both the extensive academic literature on information systems management and on practical
experience. Four of these that struck us as most useful are (Dallemule and Davenport 2017; Simon 2014; Smith et
al. 2016; Carruthers and Jackson 2017). Dallemule (who is Chief Data Officer at the global insurer AIG) and
Davenport describe the challenge as follows “More than ever, the ability to manage torrents of data is critical to a
company’s success. But even with the emergence of data-management functions and chief data officers (CDOs),
most companies remain badly behind the curve. Cross-industry studies show that on average, less than half of an
organization’s structured data is actively used in making decisions—and less than 1% of its unstructured data is
analysed or used at all. More than 70% of employees have access to data they should not, and 80% of analysts’
time is spent simply discovering and preparing data. Data breaches are common, rogue data sets propagate in
silos, and companies’ data technology often isn’t up to the demands put on it.” They distinguish defensive
approaches focusing on improving data quality and lowering costs and offensive approaches seeking competitive
advantage (Dallemule and Davenport 2017); the need for ‘eternal vigilance’ (Simon 2014); the benefits of an
organisation-wide data strategy (Smith et al. 2016 who discuss in detail what this might look like) and working out
how to overcome fierce cross-organisation competition for resources to get to a better data future (Carruthers
and Jackson 2017).

68
Data governance within organizations is a major current challenge.141 It refers to agreement on
standards, processes and procedures for securing, updating and accessing data. 142 Data
governance is also central to the design and operation of distributed ledgers:
• Ledgers require governance of both imported and exported data. Participating
organizations need to agree and comply with common standards, to facilitate data
exchanges and assure the quality of their own data. Ledgers need institutional
arrangements to ensure users agree on and implement these shared design and
operational arrangements. There may be a need for collective responsibility for
exported data.
• Ledgers can support data governance. They can provide precisely defined permissions
for reading and writing of data. There can be many categories of user, each with their
own tailored permission levels. Some, e.g. regulators, might be given broad
permissions, effectively a master key that allows surveillance of all aspects of the data.
Others more restricted, perhaps read only, or writing permissions that need to be
countersigned by other users. Through appropriately designed permissions, distributed
ledgers can support checks and controls on data quality.

As already discussed, business and public administration applications of distributed ledgers

require real world identities. This means that data governance on the ledger can be reinforced
by conventional institutional mechanisms of law, regulation and command, penalizing
misbehaviour with legal or administrative penalties.

Agreement amongst multiple users for a scheme for sharing the storage and processing of data
records – i.e. the adoption of a distributed ledger – is more than just an adoption of a new
technology; it is also a decision to contribute to and comply with standardization and collective
governance of both ledger itself and the data it contains, and committing to invest in supporting
processes and procedures.

This means that adoption of a distributed ledger for sharing the storage and processing of data
records amongst multiple users is costly. The business benefits of distributed ledgers require
careful assessment, balancing their benefits (operational efficiencies, transparency for business
decision making and public policy) against the costs of collective governance and complying
with agreed ledger standards.

Distributed ledgers do not automatically create trust

Our discussion is inconsistent with the frequent claim that distributed ledgers create ‘trust’.143
This claim neglects the challenges of inter alia security, accuracy, timeliness, completeness, and
accessibility of data (i.e. of data governance) when there are data interfaces with the world
outside of the ledger. The relationship between trust and distributed ledgers is better viewed

141
Data governance is a major aspect of effective data management within organizations, as discussed in many
white papers and blog, including from SAP, IBM, BI Surveys and others; there is relatively little research on
organisational data governance in peer-reviewed journals, a brief search turned up only (Korhonen et al. 2013).
142
A lot is involved in this, for example (BI Surveys 2018) identify ten different topics under data governance:
Documents and Content; Data security; Data Storage and Operations; Data Modelling and Design; Data
Architecture; Data Quality; Meta-data; Data Warehousing and Business Intelligence; Reference & Masterdata; and
Data Integration and Interoperability
143
For example (Goldman Sachs 2017): “Blockchain has the potential to change the way we buy and sell, interact
with government and verify the authenticity of everything from property titles to organic vegetables. It combines
the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key
information and establish trust”.

69
the other way around: trust between different organizations and entities is necessary to share
data effectively through a distributed ledger and enjoy the consequent operational efficiency
and transparency benefits they can yield. Participation in a distributed ledger may though
promote increased trust: there can be a virtuous circle with cooperation on a ledger promoting
trust and encouraging further co-operation.

Confusion has been engendered, because distributed ledgers do establish trust in one special
case: that of cryptocurrency blockchains developed for secure transfer of ‘native’ assets (i.e.
assets that never leave the blockchain, see Appendix 2 for discussion). There is no import or
export of data, no trusted third party holding the data and blockchain technologies ensure that
changes to data cannot be reversed. All (or at least most) of aspects of trust can be established
without any institutional arrangements, other than the open source software supporting the
blockchain, with ledger protocols fully coded in the software and data governance is
unnecessary to establish ‘truth’.144

This view – that trust is required in order to use distributed ledgers rather than distributed
ledgers creating trust – reinforces our previously expressed scepticism about the disruptive
impact of distributed ledger. This suggests that there may be little truth to utopian claims of
how blockchains/ distributed ledger technologies will change society, supporting a
decentralized ‘peer to peer’ transformation of economics society and politics without need for
political, business or financial institutions. 145

144
We qualify “or at least most” because the proof of work used in cryptocurrency blockchains requires quite
substantial time delays before transactions are added to the blockchain.
145
For statements of this utopian view of blockchain see (Vigna and Casey 2016; M. J. Casey and Vigna 2018). The
latter argue that “A new form of bookkeeping might seem like a dull accomplishment. Yet for thousands of years,
going back to Hammurabi’s Babylon, ledgers have been the bedrock of civilization. That’s because the exchanges
of value on which society is founded require us to trust each other’s claims about what we own, what we’re owed,
and what we owe. To achieve that trust, we need a common system for keeping track of our transactions, a system
that gives definition and order to society itself.” They then go on to state “Many see the technology’s rise as a vital
new phase in the internet economy—one that is, arguably, even more transformative than the first. Whereas the
first wave of online disruption saw brick-and-mortar businesses displaced by leaner digital intermediaries, this
movement challenges the whole idea of for-profit middlemen altogether. The need for trust, the cost of it, and the
dependence on middlemen to provide it is one reason why behemoths such as Google, Facebook, and Amazon turn
economies of scale and network-effect advantages into de facto monopolies. These giants are, in effect,
centralized ledger keepers, building vast records of “transactions” in what is, arguably, the most important
“currency” in the world: our digital data. In controlling those records, they control us.”

70
5 Distributed ledgers and public policy
The attitude of public policy makers – in finance ministries, central banks and financial and
competition regulators to the adoption of distributed ledgers and other digital automation in
financial services – can be largely described as ‘wait and see’. There are several reports, on
cryptocurrencies and crypto assets, on the possibilities of central bank issues of digital
currencies and on the appropriate regulation of distributed ledger based financial activities.

We have already discussed some of these specific issues. Here we make a few further points,
beginning with more limited adoption of distributed ledger and other data technologies, then
considering the possibilities for more radical reform.
5.1 The legal and regulatory treatment of crypto assets
We first provide a brief overview of the legal and regulatory treatment of crypto assets (see
Appendix 2 for more detailed discussion and references). A major current challenge facing policy
makers is the regulation of crypto assets held on distributed ledgers and traded on crypto
exchanges. 146 Aside from some niche crypto assets whose selling point is that they are issued
and transacted entirely outside of formal regulation, we argue that crypto assets will eventually
merge with conventional mainstream financial assets.

Firstly, what are crypto assets?” There are three main categories:

1. Cryptocurrencies – of which Bitcoin is the first and still most important example. These
are native assets on a distributed ledger (native in the sense that users cannot take
them off or bring them onto the ledger) and only transferred from one user to another
and hence potentially used for monetary exchange, without offering other services.

2. Crypto investments – these are native assets that provide rights to profit share,
ownership or repayment of a fixed sum of money.

3. Crypto utility assets – these are native assets that can be exchanged for or give access
to a product/service that is provided through the distributed ledger.

We suggest a relatively a narrow definition of crypto assets – restricting them to any of these
three asset types that is (i) issued on an unpermissioned blockchain; and (ii) traded in one of the
many cryptocurrency exchanges that have emerged in recent years to support crypto asset
trading. The reason we propose this narrow definition is to restrict attention to the subset of
assets on distributed ledgers that do not obviously fit within the ambit of current law and
regulation. This is where the regulatory challenge is to be found.

We observe a tendency for the exchanges where these crypto assets are traded to separate into
two groups: one group that want to be clearly inside of the regulatory perimeter and are
engaging closely with regulators to ensure they are fully compliant with AML and other
regulations; and another group that prefer to remain as far as possible outside of the regulatory
perimeter and engaged only (or at least primarily) in exchange between different crypto assets.

We predict that eventually, over the next decade or two, most crypto assets will be eventually
traded within the regulatory perimeter, in order to comply with investor protection and other

Regulation is needed both for investor protection and to enforce know your customer and
146

anti-money laundering regulation.

71
regulation, and as a result will become effectively indistinguishable from conventional assets.
Their only distinguishing feature will be that ownership is recorded on a distributed ledger rather
than in a conventional database. This will require “permissioned” ownership to replace the
current “unpermissioned” ownership and the ‘crypto’ and ‘conventional’ assets spaces will
merge. At the same time, it is likely that there will continue to be a distinct class of unregulated
crypto assets that will continue as fringe assets outside of the mainstream, and some residual
trading between the regulated crypto and unregulated crypto spaces.

We also note an emergent consensus on the regulation of crypto investments. In both the US
and in the EU these are securities (in the case of the EU transferable securities) and issuers are
obliged – if they are not to be entirely outside of the regulatory perimeter – to provide detailed
investor information both at time of issue and subsequent to issue, consistent with applicable
security laws.

There is less consensus on the legal and regulatory treatment of cryptocurrencies and crypto
utility assets.147 The existing cryptocurrencies such as Bitcoin seem destined to remain niche
assets, outside of mainstream finance though perhaps still attracting some limited conventional
investor interest. While there are arguments for defining and regulating them as private forms
of money, this seems not to be a practical outcome (if they are for example brought within the
ambit of the EU e-Money Directive it is unclear how its requirements on authorization could be
enforced).

Interest in cryptocurrencies as standalone assets (in our terminology ‘native’ assets on a

distributed ledger) has peaked and attention is now moving onto other assets such as stable
coins that are non-native representations of assets outside of the distributed ledger. These
alternative forms of cryptocurrency require a sponsoring organization to maintain the link
between these assets and their underlying counterpart or ensure, allowing conventional
financial regulation to be applied through this sponsor. Regulators will require permissioning to
support AML regulation and will be able to monitor effective conduct of fiduciary responsibilities
and market integrity in asset exchange.

We thus expect both crypto investments and cryptocurrencies to separate two groups: regulated
assets effectively indistinguishable from established conventional financial assets and a
periphery of alternative unregulated assets traded on venues well outside the regulatory
perimeter. In the longer run ‘crypto’ will no longer be viewed as a distinct asset class at all.

5.2 Encouraging adoption

The discussion of Section 4 reveals the central role of data sharing and establishing and
enforcing agreed standards for business processes, for taking full advantage of the
opportunities for digitisation of financial services. This though faces the same problems as any
other program of commercial standardization – difficulties in coordinating change, low private
benefits relative to social benefits and resistance from industry participants who stand to lose
their market position can prevent change. The situation parallels other industrial
standardizations. Historically and relative to other industries financial services have not been
especially good at standardization; where progress has been made in financial services

147
We have little to say crypto utility assets, except that they are so limited in amount they can be probably be
safely left as an unresolved regulatory loose end.

72
standardization this is in specific areas such as messaging standards where the mutual benefits
are clear; and even here there are competing approaches. 148

Regulatory authorities are in a position to represent the public interest (though whether they do
so is another matter, they may not see this as their responsibility if it is not clearly represented
in their legal mandates). Most obviously then should be able to act to promote technological
standardization and encourage adoption of technologies that support regulation and
supervision. Even here though the record is not particularly good. 149

Looking at the range of potential applications of distributed ledger technologies, covered in Table
2 we see opportunities for the regulatory authorities to promote adoption. For example the
adoption of the ISDA common domain model will directly support regulatory oversight –
regulators should monitor adoption and, if it is incomplete, consider whether it is appropriate to
take measures to ensure more uptake. More could also be done to support the adoption of
ledger technologies in money markets, which can played such a substantial role in transmission
of systemic financial risk in 2007-2008. The DTCC project of putting US start leg repo transactions
distributed ledger was not carried forward. But have the social returns been properly
considered? Arguably once the need for close monitoring of system risk is taken into account,
this is a project where the overall benefits, private and social, exceeded the costs.

Similar co-ordination issues arise in relation to trade finance. Our concern here is that the large
number of competing initiatives will fail because not one of them becomes the accepted
platform for international trade finance. Failure of adoption could limit digitisation in an area
where some of the biggest private and social gains are widely acknowledged to lie. Again this is
an area that public authorities, perhaps working through the auspices of the G20, should be
paying close attention.

More broadly, as we discuss above in relation to client on-boarding, KYC/ AML and regulatory
oversight, regulators needs to question if they are themselves doing enough to support
digitisation. This is now becoming a priority issue for regulators, especially in relation to the
growing application of ‘regtech’ across financial services. There is increasing dialogue between
regulators and industry on working together to promote technological adoption. But this is too
often still fragmentary and un-coordinated. At the same time other officials are busy writing new
regulations according to old processes that are not easily automated.

5.3 Radical reform?

We complete this discussion with a consideration of how public policy might support radical
reforms using distributed ledger technologies. We mention four possibilities:

1. As already discussed, lack of transparency and associated high levels of fees is a major
concern in asset management, especially for retail investors persuaded to invest in
actively managed investment vehicles. Modern distributed ledger technologies could

148
For discussion of the challenges of standardization in global capital markets and comparison with other
industries see (Houstoun, Milne, and Parboteeah 2015; Milne and Parboteeah 2015)
149
See (Chan and Milne 2019) for a discussion of the relatively weak support given by regulators to the adoption
of the global legal entity identifier for use in global capital markets.

73
 allow all managed investment funds to operate on a ‘wallet’ basis, in which individual
investors would directly participate in ownership of securities.150 This would then force
complete transparency on asset managers, the funds would have to levy explicitly
stated charges, so avoiding the sometimes substantial hidden fees that can eat up most
of the real return. Custodians would have their business model altered, but not entirely
changed, they would no longer offer securities accounts off their balance sheets but
would provide much of their existing services as investor representatives. This radical
reform could arguably also promote more investor involvement in corporate
governance (though would not entirely remove ‘free riding’ problems, even with direct
ownership it will rarely be worth the time and effort for a small investor to be closely
involved in monitoring firm behaviour).

2. As also already discussed in relation to international payments, in our view the success
of the Ripple business model depends on them persuading central banks to allow Ripple
to act as an agent providing banks worldwide with direct access to deposits with the
central bank. This is a radical reform that is not going to happen without extensive public
policy debate and policy makers will certainly not give Ripple a monopoly in this activity.
However, this may be a way for policy makers to address the troubling problem of lack
of competition in international payments and reduce some of the associated high costs
and poor service. More limited privately led reform, such as the SWIFT gpi and J.P.
Morgan’s Interbank Information Network will help, but policy makers should examine
properly the possibility of going further.

3. A further possibility would be to take this opening up of central bank balance sheets as
step further and use the framework of distributed ledgers to enforce 100% reserved
banking – essentially requiring any payment that is instructed for transmission through
a domestic payment system whether from a household, firm or non-bank corporate –
to be from an account at the central bank. 151 If this was done then banks could be
allowed to suspend withdrawals or fail without disruption to the payments systems,
serving to radically reduce the need for a bank safety net. Distributed ledger
technologies are especially relevant because the employment of smart contracts could
provide the necessary elasticity of the supply of money that has been regarded as the
principal objection to previous schemes for 100% reserved banking.

4. Another potentially radical public policy application would be to replace central

counterparties with distributed ledgers, supported by smart contracts that would, in
the event of a single member defaulting, reallocate all exposures amongst remaining
participants. The main problem there is determining the rule of allocation. Yet another,
related, radical public policy application would be to develop a distributed ledger that
handles all collateral obligations in the event of the default of capital markets
participant. We are not aware any detailed exploration of these possibilities, or if they
are feasible even in theory. But they represent the kind of radical application of
distributed ledger technologies that public authorities should be prepared to consider.

150
Much as they already participate as direct investors in loans through alternative lending platforms such as
Zopa, Lending Club or Funding Circle, see (Milne and Parboteeah 2016).
151
This possibility is described in more detail in (Milne 2017, 2018). This would be an extremely radical
implementation of central bank issue of digital currency (CBDC), requiring all transactions to be conducted using
the CBDC. The practical implementation of CBDC being currently considered by a number of central banks
worldwide is much less radical than this. Broader discussion is provided by (Kavuri, Milne, and Wood 2019)

74
Finally, we note the key responsibility of public policy makers for supporting identity solutions
that can in turn promote financial inclusion and counter fraud. The Aadhaar project in India, that
has now issued well over 1.26bn identities and is projected to be a foundation for digitisation of
business and of financial and public services in India, is one example of what can be done. We
are not saying that this model need be exactly followed in other countries, a range of approaches
perhaps relying on artificial intelligence applied to a broad range of identity related data rather
than a single point of registration is likely to be more suitable for most developed countries. But
the key point remains, that ensuring adequate identification of individuals and of legal person
remains both a public sector responsibility and a key support to the digitisation of the public and
private economy. More reliable identification will in turn be a boost to the adoption of
distributed ledger technologies. Identify solutions are public good, they are (to use the
economics jargon) ‘non-rival’, an effective identity solution can be used many times, and they
are characterised by substantial fixed costs. For both these reasons substantial public sector
involvement, in design and approval of identity systems, can be economically justified.

75
6 Conclusions
This report is the outcome of a twelve month long research project that has been written for
decision makers in private industry and public policy institutions, examining the extent to which
distributed ledger and associated crypto assets can be the foundation for a major technology-
based change in the value chains in banking, capital markets and insurance. We have provided
a conceptual analysis of distributed ledger in Sections 2. In Section 3 we provide a close
examination of the range of applications, current and potential across the full range of banking
and financial services, including domestic and international payments, security and derivative
trading, loan intermediation, supply chain finance and asset management and insurance. This
section also reviews seven leading case studies of application of distributed ledger technologies
in financial services. Section 4 considers the adoption decision: when do the benefits of
investment in distributed ledger technologies justify the costs of adoption? Section 5 is an
analysis of policy issues.

Our analysis offers a number of insights. Perhaps most important is the plural in our title
distributed ledger technologies. It is a fundamental misunderstanding to think that there is one
cohesive distributed ledger or blockchain technology that will come to be widely used across
financial services when it has matured to the appropriate level. No: distributed ledgers are
composites that combine a number of technological elements most of which are already
mature. The main interest is the component technological opportunities, which will often be
applied independently, not their combination into distributed ledgers.

Combining these technologies into a distributed ledger – with no single responsible institution
having control over the ledger i.e. a distributed ledger as narrowly defined in our Definition 1
– is useful for support data sharing in those specific and in our judgement rare situations where
users are reluctant to give responsibility for maintaining the data to a single entity. It is also
appropriate when participants in an industry wish to use standard shared arrangements to
outsource processing responsibilities which lie outside their core competences.

Whether relying on a distributed ledger or using a more conventional ledger under institutional
control, it is still essential to address challenges of data management and data governance. In
most applications other than basic asset transfer, distributed ledgers just like conventional
databases rely on the quality of imported data introduced from outside the ledger. If incorrect
data is introduced from the outside, then the ledger is no longer reliable. It is therefore a
mistake to believe, as some claim, that distributed ledgers promote trust.

While our assessment of distributed ledgers is more sceptical than many other commentators,
we still believe that there is revolution in prospect through digitisation of financial services over
the next two decades; a revolution in which the various consortia that have been established
to develop and promote distributed ledger technologies will play prominent roles. The
technologies are revolutionary even though distributed ledgers are not.

We also find – in our review of fourteen areas of application and our seven case studies – that
the adoption of distributed ledger in financial services continues to be at the very least patchy.
But we need to be clear here: digitisation is a pressing issue, across the industry, to lower costs
and to respond to new technology based competitors; digitisation and automation of business
process is an ongoing revolution across financial services; but digital ledgers – defined narrowly
as most commentators have perceived them according to our Definition 1 in Section 2 – are

76
not finding much application. Only a small minority of initiatives are being taken beyond proof
of concept (against the hundred plus initiatives documented in our Appendix 1, we found only
seven case studies of commercial scale application worth reviewing and only three of these are
really distributed ledger at all).

In short distributed ledger technologies are part of a broader disruptive technological

transformation of financial services, but distributed ledgers themselves (or as some prefer to
call them blockchain) are not revolutionary. A focus on distributed ledgers – especially on
rather utopian claims for them as ‘truth machines’ – is in our view simply a distraction from the
key business process issues being faced in the industry. It is tempting to collapse complex
operational issues into a single phrase “distributed ledger” but this is fundamentally
misleading. It is necessary instead to address the potential of the component technologies
(immutability, cryptographically secure, sharing of data, smart contracts with automated
processing) and consider carefully their application in business context.

We also downplay the importance of crypto assets – viewing these as a further distraction. Yes,
they offering potential short term profits for financial institutions that are early movers into
providing investment and exchange services, but the asset class is small and highly risky. We
argue that as regulation is brought to bear the crypto assets will eventually merge with not
remain distinct from conventional financial assets. There is too much attention to crypto assets
and not enough attention to the challenges of ensuring digitisation supports competition,
lower costs, lower risks and helps the industry meets new currently unmet financial needs.

While the supporting technologies continue to develop, we view a further key challenge as
being around governance of those technologies and of the data sharing they support. From the
fourteen areas of application we have examined and our six case studies, the full exploitation
of digitisation requires agreement on standards and interoperability and focus on longer term
goals of improved customer experience, not just costs and returns.

We also make recommendations and suggestions for public policy, arguing that public
authorities have a responsibility for promoting the digitisation of financial services and achieve
the resulting benefits from cost and risk reduction as fully as possible. Many of these benefits
are social not private and even where the gains are private public policy makers have a role to
play co-ordinating change and helping to overcome vested interests. We are seeing the
beginnings of a digital revolution in financial services.

We envisage the possibility of ultimately quite radical change, using digital technologies to
support a redesign of the architectures of asset management and banking to promote
transparency and financial stability. In this respect our views are aligned with those of
enthusiasts for cryptocurrencies and digital ledgers. Where we differ is that we do not find that
such radical transformation will be the outcome of market forces. Such radical change will lead
to substantial loss of earnings for many incumbent financial institutions. Network effects mean
these incumbents are strongly entrenched in most (though not all) of their markets and will not
be displaced by start-ups employing new technologies. As a result such change will have to be
led by public authorities with strong political backing. We also judge that such radical change
will seem too risky to be pursued in the immediate future. It will only be real possibility once
the technologies supporting secure data sharing and automated data processing, i.e. the
technologies underpinning digital ledgers, are much more widely used and understand.

77
 Appendix 1: Announced distributed ledger initiatives in banking and capital markets
The table provides a summary of announced distributed ledger initiatives and their choices over distributed ledger technology in the financial
industry. Also included is relevant initiatives in slightly different areas and regulatory initiatives. The initiatives are placed in chronological order.
The first date of the article initiative was proposed is used for the chronological placing (i.e. not the date of the updates). In the implemented
column, ‘No’ signifies intentions/plans to do something. `Yes’ is placed for pilots, up and running implemented DLT projects etc. In addition, in that
column, we highlight between whether the initiative is proof of concept or commercial operation. When easy to simplify, the words in bold provides
the area of the distributed ledger initiative.

Name Date Web link Alliance/ Crypto/ Summary

POC/ Real/
Impleme Infrastructu
nted re
Visa, Citi, 9 https://www.forbes.com/sites/laurash P R Visa, Citi, Nasdaq $30 million investment in Chain.
Nasdaq Septemb in/2015/09/09/visa-citi-nasdaq-invest- Chain is working with Nasdaq to test trading with shares in private
investment er, 2015 30-million-in-blockchain-startup-chain- companies with DLT.
in Chain com/#33f26353199c

More information below

https://chain.com Trading with share

Sept 10, announced merger to form $44 million

1
Interstellar, see
https://blog.chain.com/chain-and-
stellar-are-joining-forces-
ecd44fb4c474

And (not a Nasdaq opinion)

https://www.nasdaq.com/article/stella
r-based-lightyear-acquires-chain-
forms-new-entity-cm1020781

78
 Symbiont 3 March, https://www.finextra.com/pressarticle P R Symbiont working through Synaps, a joint venture with
2016 /63423/ipreo-and-symbiont-team-on- IPREO. Synaps uses Symbiont blockchain technology and smart
Syndicated blockchain-for-syndicated-loans contracts for data management and trade settlement in the
loans syndicated-loan market.
More information below
Note that article on 6 June, 2018 in waterstechnology suggested the
https://symbiont.io/solutions/ project has gone quiet.
2
Demonstration on 20 March, 2017
Syndicated-loan market
http://www.synapsloans.com/press-
releases/

Manifold 13 April, https://www.americanbanker.com/ne I I Royal Bank of Canada and Manifold technology is working together.
Technology 2016 ws/rbc-applies-blockchain-as-a-loyalty-
boost Manifold specializes in highly scalable blockchain infrastructure.

See below for more information Manifold Technology is now available as a cloud software on Amazon
Web Services (AWS). Corda also available on AWS.
https://www.manifoldtechnology.com

24 July, https://www.prnewswire.com/news-
3
2018 releases/amazon-announces-manifold-
serverless-blockchain-partnership-
300685234.html

and

https://s3-us-west-
2.amazonaws.com/manifold-
technology/AWS-serverless-
blockchain.pdf

79
 Barclays test 19 April, https://www.cnbc.com/2016/04/19/b P R Barclays test of trading derivatives using smart contracts and
derivatives 2016 arclays-used-blockchain-tech-to-trade- blockchain technology. Barclays used Corda (developed by R3).
4
derivatives.html

Merrill 10 https://www.gtreview.com/news/asia/ P R Bank of America Merrill Lynch (BofAML), HSBC and the Infocomm
Lynch, HSBC August, banks-blockchain-innovation-letters- Development Authority of Singapore (IDA) applies letter of credit on
letter of 2016 of-credit/ blockchain.
credit
5

Barclays’s 7 https://www.finextra.com/newsarticle P R Barclays Bank and Wave completed a live Letter of Credit transaction
live letter of Septemb /29400/barclays-executes-live-letter- between Ornua (the Irish Dairy Board) and Seychelles Trading
credit er, 2016 of-credit-transaction-using-distributed- Company on a DLT.
ledger-technology
6

PeerNova’s 21 https://bitcoinmagazine.com/articles/s P R PeerNova and State Street have been trailing a blockchain-enabled
blockchain Septemb tate-street-and-peernova-trial-new- platform for the tracking and monitoring the flow of funds.
for capital er, 2016 blockchain-prototype-for-capital-
tracking tracking-1474469105/
7

80
 Visa and 27 https://distributed.com/news/visa- P R Visa partnership with blockchain company Chain to develop a secure
Chain October, partners-with-chain-to-process-b-b- way to process B2B payments. It will provide a pilot to financial firms.
partnership 2016 transactions-globally-using-blockchain-
technology/
The update of Visa B2B Connect Product is available for developers
through trial. Also, will be available to other partners soon including
Commerce Bank in the United States, Shinhan Bank in South Korea,
8 Union Bank of Philippines and United Overseas Bank in Singapore.

Update below: Process B2B payments

11
Novembe https://community.developer.visa.com
r, 2017 /t5/Blogs/Blockchain-Based-Visa-B2B-
Connect-APIs-in-Action/ba-p/7043

PricewaterCo 17 https://distributed.com/news/pwc- P I PwC launched a Digital Asset Digital Services called Vulcan, a new
opers Novembe launches-vulcan-a-compliance- blockchain-based platform with emphasis on identity verification and
r, oriented-blockchain-for-banks-and- compliance services. PwC is keen on making Vulcan attractive to
2016 governments/ banks and financial services.
9 Vulcan’s services include digital asset wallets, international payment
processing and investment and trading services.

Identity verification

Hong Kong Decembe https://www.ledgerinsights.com/hong- HK trade finance Platform PoC initiated December 2016.
Trade r, 2016 kong-trade-finance-blockchain/ Now Launched.
10 Finance
platform

Xaurum 2017 https://xaurum.org/Whitepaper.pdf P C Xaurum is a Slovenian firm that offers the ability to exchange tokens
for physical gold.
11

81
 Depository 12 https://distributed.com/news/major- P R Depository Trust & Clearing Corporation (DTCC) partnered with R3,
Trust & January, wall-street-clearinghouse-dtcc- IBM and Axoni to provide a DLT for post-trade derivatives processing
Clearing 2017 develop-operational-blockchain- including credit default swaps.
Corporation network-derivatives/
(DTCC) Aim to provide permissioned distributed ledger network for
derivatives, governed by DTCC, with peer nodes at participating firms.

https://distributed.com/news/dtcc-
launch-blockchain-credit-defaults-
25 May, swaps-reporting-early-2018/ DTCC plans to go live in first quarter of 2018 with blockchain-driven
2017 platform for credit swaps reporting.

More information below

http://www.dtcc.com/blockchain At the end of Nov 2018, DTCC announced that it has continued to
12 https://axoni.com/press/ conduct in-depth industry-wide testing with clients. Their focus
remains on delivering a solution that is efficient, cost-effective and
that protects the safety, resiliency and stability of the global financial
Update below: system. The firm continues to engage with clients in the test process,
5 https://www.waterstechnology.com/i getting feedback and evolving their approach based on learnings to
Septemb nfrastructure- ensure the solution meets the needs of the industry and other key
er, 2018 technologies/3845566/dtcc- stakeholders.
blockchain-platform-scheduled-for-
early-2019-launch
DTCC Blockchain platform scheduled for late 2019

Credit derivatives information warehouse

Juzhen 18 https://www.coindesk.com/chinas- P R Juzhen Financials plans to launch its own blockchain tech for banks in
Financials January, biggest-blockchain-startup-will- 2017. Juzhen Financials is the largest China-based blockchain start-up
2017 release-new-tech-2017/ in history raised $23 million in Sep. 2016. Juzhen worked with
13
(China) ChinaLedger blockchain consortium.

No updates on the blockchain developments.

82
 Blockchain tech for banks

Generali and 9 https://distributed.com/news/insuran P R Generali and R (insurance companies) join B3i.

Reinsurance February, ce-giants-generali-and-rga-join-
Group of 2017 blockchain-insurance-industry- B3i was launched in October 2016
America initiative-b3i/
(RGA), B3i looks to explore the uses of DLT in the re/insurance industry.
insurance
companies, Members include Achmea, Aegon, Ageas, Allianz, Generali, Zurich
14
join B3i Insurance Group among many more.

More information DLT in the re/insurance industry

https://b3i.tech/home.html

Enterprise 28 http://fortune.com/2017/02/28/ether A R 30 big banks and tech giants including Chase, Microsoft, and Intel
Ethereum February, eum-J.P. Morgan-microsoft-alliance/ united to build business-ready versions of the software behind
Alliance 2017 Ethereum.
Update below:
86 new members want to be part of organization. E.g. Monax joins
Customize https://distributed.com/news/latest- the Enterprise Ethereum Alliance. The firm is concentrated in creating
Ethereum for 8 June, additions-move-enterprise-ethereum- smart contracts.
15 industry. 2017 alliance-toward-mainstream-
disruption/ The alliance is built to customize Ethereum for industry.
Monax
https://www.coindesk.com/enterprise Still work continuing on Enterprise Ethereum Alliance.
-ethereum-alliance-isnt-dead-got-
2 May, roadmap-prove/
2018
https://monax.io/company/

83
 Orebits Corp 15, https://www.businesswire.com/news/ P C Orebits Corp., a provider of digitisation services for unrefined
and March home/20170315005332/en/Orebits- commodities and Symbiont, (DLT company) have partnered to
Symbiont 2017 Symbiont-Deploy-Distributed-Ledger- provide clients the opportunity to invest in unrefined gold via smart
Technology-Digitize certificates.
16
See more information below

http://orebits.io

Wanda 15 P I Wanda’s Polaris platform aims to lead the China’s blockchain

Feifan March, https://news.8XRP.com/wandas- industry. Wanda is the blockchain’s platform Polaris for smart supply
Technology 2017 polaris-platform-aims-to-lead-the- chains, pharmaceutical management, finance and invoicing.
Research chinas-blockchain-industry
Center Wanda officially joined the Linux Foundation’s Hyperledger project in
August, 2016 Wanda drafted the Chinese version of the white paper
for blockchain.
(China) 12 Update below:
17
March, https://www.chinamoneynetwork.com Wanda signed in as Vice Chairman Unit of Blockchain Industry and
2018 /2018/03/12/dalian-wandas-tech-arm- Technology Forum in September, 2016.
forms-partnership-new-zealand-
blockchain-firm-centrality Dalian Wanda’s tech arm Wanda Internet Technology Group has
formed strategic alliance with Centrality (Auckland-based blockchain
firm) to develop an ecosystem that connects consumers and retailers,
and serves Wanda Group’s enterprise merchants.

Natixis, IBM 28 https://www- P I Natixis, IBM and Trafigura introduce first-ever Blockchain solution
and Trafigura March, 03.ibm.com/press/us/en/pressrelease/ for U.S. crude oil market.
18 blockchain 2017 51951.wss
for U.S crude
oil

84
 Tokenization 30 https://distributed.com/news/how- P C Tokenization is the process of converting rights to an asset into a
of real world March, tokenization-putting-real-world-assets- digital token on a blockchain i.e. diamonds, gold, real estate, oil.
assets: 2017 blockchains/ General information.
initiatives
19 Many ways of doing it. However, note that if buyer needs to be certain
Tether converts cash into digital that token is properly linked to the real asset, otherwise the value of
currency: the token will drop to zero.

https://tether.to Tokenization
10 Chinese 7 April https://www.coindesk.com/insurance- A R Shanghai Insurance Exchange partnered Cathay Life Insurance, Meiji
insurance 2017 firms-blockchain-test-insurance-china/ Yasuda Life Insurance, AIA Group, China Continent Property &
companies Casualty Insurance and Minsheng Life Insurance to test blockchain.
test
blockchain See below for Shanghai Insurance Life Insurance
20
Exchange
http://www.sigchina.com/index.php?
m=content&c=index&a=show&catid=9
9&id=98

Fidelity 13 April, https://distributed.com/news/asset- A R Fidelity Investments join IC3.

Investments 2017 manager-fidelity-join-blockchain- Faculty members at Cornell University, ETH Zurich, University College
join IC3 group-ic3/ London, UC Berkeley among others.

More information below The blockchain group focuses on the implementation of

cryptocurrencies, smart contracts, and DLT into the financial system.
http://www.initc3.org
21
“IC3 is an initiative of faculty members
at Cornell University, Cornell Tech, DLT into the financial system
EPFL, ETH Zurich, UC Berkeley,
University College London, UIUC and $3million NSF grant.
the Technion. It's based at the Jacobs
Technion-Cornell Institute at Cornell
Tech in NYC.”

85
 R3 news 27 April, https://www.reuters.com/article/us- A R J.P. Morgan & Chase , Goldman Sachs, Morgan Stanley, NAB left in
2017 J.P. Morgan-r3/J.P. Morgan-chase-co- late 2016. JP leaves blockchain R3 consortium in April 2017.
leaves-blockchain-consortium-r3- Differences over funding.
idUSKBN17T2T4
Banks, R3 build blockchain-based payments system
Update below:
R3 to open source Corda
31 https://www.reuters.com/article/us-
22 October, banks-blockchain-r3/top-banks-and-r3- Payments
2017 build-blockchain-based-payments-
system-idUSKBN1D00ZB

3
Novembehttps://distributed.com/news/r-to-
r, 2017open-source-corda-patent-application-
still-being-pursued-for-genuinely-new-
distributed-ledger-approach/
CME group’s 11 May, https://distributed.com/news/move- I C CME Group has partnered with UK’s Royal Mint and is looking to bring
gold to a 2017 over-bitcoin-cme-group-will-offer-real- physical gold to a blockchain-based asset. The new asset will be a
blockchain- digital-gold/ token known as RMG (Royal Mint Gold) and backed by physical gold
based asset in the Royal Mint vaults. Retail orientated.
More information below

23 https://www.royalmint.com/invest/bul Updates at Sep. 2018, RMG appears to be available.

lion/digital-gold/
Blockchain-based gold

86
 AST’s 23 May, https://distributed.com/news/blockch P R AST partnered with NuArca to introduce a blockchain-enabled system
blockchain 2017 ain-comes-corporate-governance-ast- for proxy vote tabulation.
corporate proxy-voting/
proxy voting

24 Update below Update in Jan 2018 on NuArca website.

Jan, 2018 Successful milestone for the voting, but still has not been released

http://www.nuarca.com/blog/blockch Proxy vote tabulation.

ain-not-solution

Africa’ 15 June, https://distributed.com/news/africa- P R Africa’s blockchain developing

Blockchain 2017 next-hub-blockchain-development/
roundup BitHub.Africa was est. Dec. 2015 based in Kenya provides consulting
More information below to organizations working with blockchain particularly in financial
services
http://bithub.africa
25 Bitland is a blockchain-based land management system which will
allow people to register property ownership via a blockchain.
http://landing.bitland.world
Bankymoon is a South African company working to leverage Bitcoin
and other cryptocurrencies to enable securities trading and electronic
http://bankymoon.co.za payments.

87
 Banks trade 26 June, https://www.gtreview.com/news/euro P R Digital Trade Chain will be built and hosted by IBM and powered by
finance 2017 pe/seven-banks-to-go-live-with- Hyperledger Fabric 1.0. Memorandum of understanding (MoU)
platform hyperledger-blockchain-trade-finance- signed in January between Deutsche Bank, HSBC, KBC, Natixis,
platform-in-2017/ Rabobank, Société Générale and UniCredit to collaborate on the
development and commercialisation of the platform.
Update below:
Changed name to we.trade.
https://www.bankingtech.com/2017/1
26 0/ibm-and-eight-banks-unleash-we- Expected to operate in March 2018
17 trade-platform-for-blockchain-
October, powered-commerce/
2017 and Trade finance platform. Seeking to involve SME and corporate
https://www.gtreview.com/news/finte customers from late 2018
ch/we-trade-blockchain-platform-
enters-production-environment/

Mastercard 6 July, https://distributed.com/news/masterc P R Mastercard and credit card companies are working on solutions to
2017 ard-looking-stem-theft-through- employ blockchains to end information thefts.
blockchain-technology/
Mastercard has filed over 35 blockchain-related patents.
More information below
27 Mastercard have invested in Digital Currency Group and joined
Enterprise Ethereum Alliance.
https://dcg.co

Information thefts

Natixis AM’S 6 July, https://www.investmenteurope.net/in Natixis Asset Management purchased shares through blockchain-
fund 2017 vestmenteurope/news/3720871/bnpp dedicated platform, FundsDLT.
28
distribution -blockchain-fund-trading FundsDLT developed by collaboration between Fundsqaure, inTech
and KPMG Luxembourg

88
 SWIFT’s 17 P R SWIFT announces a PoC to test distributed ledger in the interbank
blockchain October, Pilot announced: payments space. The PoC specifically examined how the system could
pilot for 2017 https://www.waterstechnology.com/i meet requirements around governance, security and data privacy as
international nfrastructure- they relate to the nostro (foreign-currency accounts other banks have
payments technologies/3396031/swift-targets- with counterparties) reconciliation process.
interbank-balances-with-expanded-
blockchain-pilot

Pilot undertaken:
29
https://www.waterstechnology.com/i
ndustry-issues-
initiatives/3435056/swift-mulls-
lessons-from-blockchain-nostro-pilot

See more information below

https://www.coindesk.com/swift-
announces-successful-proof-of-
concept-trial-for-dlt-platform/
BNP Paribas 11 July, https://www.caceis.com/whats- P R BNP Paribas, CACEIS, Caisse des Dépôts, Euroclear, Euronext, S2iEM
and CACEIS 2017 new/press-releases/press- and Société Générale with the support of Paris EUROPLACE announce
releases/article/launch-of-liquidshare- the creation of the European fintech venture LiquidShare.
the-european-blockchain-fintech-for-
30
sme-post-trade/detail.html The start-up will aim to develop a post-trading blockchain
infrastructure for the Small and Medium Enterprise (SME) market.

Blockchain- 19 July, https://distributed.com/news/blockch P R Hive project platform applies blockchain technology to invoice
based 2017 ain-based-solution-liquidity-needs/ factoring creating a distributed and highly efficient public ledger to
31 solution to open up new sources of finance to SMEs.
liquidity:
Hive project Invoice factoring
Delaware 20 July, https://distributed.com/news/what- A I Delaware Blockchain Initiative coordinates govt. efforts around
32 Blockchain 2017 does-delawares-blockchain-legislation- incorporating blockchain into land titles, birth, death certificates,
Initiative mean-equity-markets/ professional licences, collateral claims and company filings.

89
 (launched
July,
2016) More information below
Important change to foundational infrastructure of corporate finance
https://corpgov.law.harvard.edu/2017 due to leadership and value-added services.
/03/16/delaware-blockchain-initiative-
transforming-the-foundational- Regulation Impact
infrastructure-of-corporate-finance/

CreditEase 28 https://www.coindesk.com/lending- P R CreditEase has launched a private blockchain service based on

March, giant-creditease-launches-blockchain- Ethereum.
(China’s 2017 supply-chain-service/
largest peer- Founded in 2006, Beijing-based start-up offers microfinance services.
to-peer It connects small borrowers with lenders via a web platform.
33 lending
service) The company also has a CreditEase Fintech Investment Fund.

Microfinance

Polymath Inc 30 https://business.financialpost.com/ent P C Polymath is a platform for start-ups that want to launch own
August, repreneur/fp-startups/its-about-to- cryptocurrencies. The platform guides users from creation, to
34 2017 become-even-easier-to-issue- fundraising, to secondary-market trading and how to comply with
blockchain-based-coins strict regulations.

UBS and the 3 https://www.finextra.com/blogposting I R In September 2015 the Swiss bank UBS launched its first Utility
Utility Septemb /14459/ubs-and-the-utility-settlement- Settlement Coin (USC) concept in collaboration with UK-based
35 Settlement er, 2017 coin blockchain company Clearmatics. UBS is leading team.
Coin

90
 UBS, IBM, 4 October https://www.waterstechnology.com/o P R BMO, CaixaBank, Commerzbank and Erste Group is added to the
Bank of 2017 perations/3430716/ubs-ibm-add-four- group who completed a successful PoC concept last year. The Batavia
Montreal banks-to-blockchain-project platform stated in 2016 with the aim of creating multi-party, cross-
(BOM), border trading networks for trade finance, developed using
CaixaBank, the Hyperledger Fabric Blockchain framework.
Commerzban Update 19 April, 2018 below
36
k and Erste IBM highlight that corporate clients have now successfully completed
Group https://www.ibm.com/blogs/blockchai the first live pilot transactions on the Batavia platform. Cross-border
n/2018/04/blockchain-based-batavia- trading networks
platform-set-to-rewire-global-trade-
finance/

BlackRock, 13 https://www.ai- BlackRock test private blockchain via Aladdin for custody partners.
Aladdin- October, cio.com/news/blackrock-testing- The money managing system Aladdin will lead to more transparent
based 2017 private-aladdin-based-blockchain- processing.
blockchains custodians/

37

MasterCard’s 20 https://distributed.com/news/masterc P R Mastercard will allow developers to access its Mastercard blockchain
blockchain October, ard-moves-toward-fast-blockchain- API published on Mastercard Developers.
payments 2017 payments/
38 MasterCard’s blockchain technology provides privacy ensuring
transaction details are shared among participants

Privacy
Nasdaq’s 8 https://business.nasdaq.com/marketin I R 1) Blockchain technology to the NYIAX. Trading advertising contracts,
blockchain Novembe site/2017/Blockchain-Forges- incorporating forwards...
39 initiatives r, 2017 Ahead.html 2) Nasdaq and Citi Treasury and trade partner to offer integrated
payment solution that enables straight through payment processing
and automates reconciliation using DLT

91
 This seems to be the Nasdaq Linq 3) Collaborating with SIX using software from Chain (partner), to
project announced May 2017 provide DLT for a Minimum Viable Product (MVP) for SIX's OTC
https://www.nasdaq.com/article/nasd structured products business.
aq-and-citi-announce-pioneering-
blockchain-and-global-banking-
integration-cm792544 but not as far as
we can tell interbank…

Visa 17 https://www.coindesk.com/visa- P R Visa starts first phase of blockchain B2B payments

Novembe launches-first-phase-of-blockchain-
40
r, 2017 b2b-payments-system/ B2B payments

41

ASX 6 https://uk.reuters.com/article/us-asx- I R Australia’s ASX Ltd will replace its registry, settlement and clearing
Ltd (Australia Decembe blockchain/australias-asx-selects- system with blockchain technology to cut costs for customers.
) r, 2017 blockchain-to-cut-costs-
idUKKBN1E037R Delayed switchover to blockchain by 6 months
Note: Alistair
Milne Update below: Settlement and clearing system
personal 4
42
communicati Septemb
ons reveals er, 2018 https://www.reuters.com/article/asx-
that the blockchain/australias-asx-delays-
technology blockchain-transition-by-6-months-
may not be idUSL3N1VQ1KI
blockchain.

3 https://www.calastone.com/news/cala P R In June 2017, Calastone successfully completed the first phase of its
Decembe stone-to-bring-mutual-funds-market- blockchain-enabled distributed market infrastructure PoC. This saw
43
r, 2017 onto-blockchain-in-2019/ Calastone test and verify the feasibility of using the technology to
create a global marketplace for the trading and settlement of mutual

92
 funds. Calastone announced that 2019 it will bring the technology to
the market place.

Trading and settlement of mutual funds

Currency of 23 https://www.forbes.com/sites/rogerai P C The main part of COTI is Trustchain. Trustchain lies on a multi-DAG
the Internet Decembe tken/2017/12/23/bitcoin-beyond-how- (directed acyclic graph) to increase scalability.
(COTI) r, 2017 digital-currencies-can-solve-consumer-
44 payment-needs/#6218f68d2e74 The Proof-of-Stake algorithm reduces fees for those with good scores.

See more information Payments

LDC, ING, https://www.gtreview.com/news/finte The first live agricultural commodity transaction on the blockchain
agricultural ch/major-banks-and-traders-test- undertaken by Louis Dreyfus Company, ING, Societe Generale and
45 commodity blockchain-platform-for-commodity- ABN Amro. This transaction saw 60,000 tonnes of soybeans shipped
transaction trade/ from US to China.

SETL 11 https://setl.io I R SETL has worked on numerous projects. These include with OFI Asset
January, Management. OFI Asset Management has successfully used the IZNES
2018 system, the pan-European record-keeping platform for funds using
46 blockchain technology in a series of trials with selected clients. IZNES
is now started to process live transactions.
Four asset management companies are using IZNES. Furthermore,
SETL worked with Deloitte and Metro Bank among others.
Cognizant’s 18 https://www.cognizant.com/perspecti P R Blockchain-powdered peer-peer mortgage financing
mortgage January, ves/revitalizing-trade-finance-with-
lending 2018 blockchain-part-1-of-5
Cognizant Peer-peer mortgage financing
Technology
47 Solutions
founded
many years
ago

93
 Guardtime 24 https://guardtime.com/blog/guardtim I C Guardtime and Metaco launch SILO.
and Metaco January, e-and-metaco-launch-silo-the-crypto-
2018 asset-custodian-solution-for-financial- Guardtime specialize in anti-tamper hardware.
institutions
SILO is constructed for exclusively for financial firms allowing trading
48 of cryptocurrencies, with protection of assets and liquidity.

SmartTrade’s 1 https://www.smart- P R SmartTrade Technologies (multi-asset electronic trading solutions

post trade February, trade.net/2018/02/01/blockchain- provider) launched a blockchain-based post trade solution. The
solution 2018 based-post-trade-solution/ solution captures and sends post-trade data to a private and
49 permissioned distributed Ledger. This guarantees all trades are
recorded and cannot be altered.

Post trade
FactSet and 8 https://www.waterstechnology.com/i P C DLT provider CG Blockchain and FactSet entered into a partnership to
CG February, ndustry-issues- enable FactSet’s order and execution management system to access
blockchain 2018 initiatives/3491731/factset-pairs-its- CG Blockchain’s products through the latter’s app store, BCT
50
partnership oems-with-cg-blockchains-distributed- Fundstore.
ledger

Northern 22 https://www.reuters.com/article/nthe Northern Trust is using IBM to record information by private equity
Trust , February, rn-trust-ibm-blockchain- fund, Unigeston.
51 Unigeston 2018 idUSL1N1G61TX
and IBM

Credit Suisse 1 March, https://uk.reuters.com/article/uk- P R Credit Suisse Group AG and ING Groep NV have completed a 25
Group AG 2018 blockchain-securities/banks-complete- million euros securities lending transaction using blockchain-based
52 and ING 25-million-euros-securities- software
Groep NV transaction-on-blockchain-platform-
idUKKCN1GD4DW

94
 Nasdaq’s 1 March, https://business.nasdaq.com/mediace P R Start-up Extraordinary Re has signed a market technology agreement
blockchain 2018 nter/pressreleases/1694790/nasdaq- with Nasdaq, in order to build out a marketplace for the trading of
insurance and-extraordinary-re-sign-market- insurance-linked securities (ILS).
marketplace technology-agreement Nasdaq will provide a matching engine to Extraordinary Re.
53
Extraordinary will use DLT and a private cloud as part of the
See below for more information technology foundation for its platform (within a Bermuda-domiciled
reinsurer).
https://www.extraordinaryre.com

Bloom’s 2 March, https://venturebeat.com/2018/03/02/ P R Bloom is an Ethereum-based decentralized app that promises security
credit app 2018 blooms-blockchain-credit-app-sees- to personal data. Bloom saw record signups
record-signups-after-more-bad-news- Credit-score app
from-equifax/ Bloom allows traditional and digital currency lenders to work with
individuals who are unable to get a bank account or credit score, or
to keep financial data secure.
More information below
54
BloomID: Secure identity
BloomIQ: Tracking
https://distributed.com/news/blockch BloomScore: Rating
ains-could-be-answer-fairer-lending-
systems/ Credit-score app

95
 Nasdaq’ 15 https://www.nasdaq.com/article/swed P R The Swedish government agency Lantmäteriet has been testing ways
Sweden pilot March, ish-mapping-authority-pioneering- to record property transactions on a blockchain since 2016. The
real estate 2018 blockchain-based-real-estate-sales- agency is looking for volunteers who want to pioneer the practice of
Swedish 23 April, cm935347 buying or selling property using the blockchain-based platform in the
government 2018 next few months.
property https://www.thestreet.com/investing/
sales nasdaq-all-in-on-blockchain- The Swedish government agency Lantmateriet the national mapping,
technology-14551134 cadastral and land registration authority likely to be one of the first
55 government agencies to test using blockchain technology for
https://www.wsj.com/articles/a- conducting property sales.
pioneer-in-real-estate-blockchain-
emerges-in-europe-1520337601 The agency is working with Telia (telecommunications), Kairos future
(consulting firm), Chromway (blockchain platform) in conducting the
property sales in 6 months’ time-however, still no updates on
progress.

Conducting property sales.

TMX’s 22 https://www.tmx.com/newsroom?id= I C TMX Group wholly-owned subsidiary, Shorcan Digital Currency
Shorcan March, 650 Network has entered into an agreement with Paycase Financial
announces 2018 (Paycase), to launch a new cryptocurrency brokerage service focused
56 Cryptocurren on Bitcoin and Ether.
cy initiatives
Cryptocurrency brokerage

Spring Labs’ 27 https://www.forbes.com/sites/jeffkauf I R Spring Labs’ raises $15 million four months after founding
funding March, lin/2018/03/27/blockchain-startup-
raising 2018 spring-labs-raises-15-million-in-vc- Products make possible for lenders, banks and data vendors to
57
four-months-after-its- exchange and verify data without any party taking a central position.
founding/#3ff8fe452dfc Verify data

Tradewind’s 28 https://www.waterstechnology.com/e I C Tradewind went live with their blockchain-based gold trading
blockchain March, xchanges-trading- platform called VaultChain on 23 March, 2018. VaultChain digitize
58
for gold 2018 venues/3556366/tradewind-launches- gold on a blockchain.
blockchain-for-gold

96
 Digitize gold

Tradewind March, https://www.ledgerinsights.com/block Tradewinds Markets launched an industry focused platform in March,
59
Markets 2018 chain-gold-royal-mint-tradewind/ 2018
Santander’s 12 April, https://ripple.com/insights/santander- P R Santander launched One Pay FX and becomes first bank to provide a
mobile App 2018 launches-first-mobile-app-for-global- blockchain-based international payments service to retail customers.
payments-using-ripples-xcurrent/
One Pay FX is a Ripple-enabled mobile app for cross-border payments
using xCurrent (Ripple product).
60 See below: (cryptography)
https://www.cnbc.com/2018/04/12/sa
ntander-launches-blockchain-based- International payments service (foreign exchange service) I presume
foreign-exchange-using-ripple- this is limited to Santander customers at both ends.
tech.html

R3 13 April, https://www.coindesk.com/beyond- A R R3 is looking to expand Corda to wide range of businesses not only
2018 banking-r3-expanding-vision-global- financial.
61 blockchain/
R3 financed by consortium of banks- Corda enables institutions to
transact directly using smart contracts
AXA Lab Asia 16 April, P R XA Lab Asia is in talks with Shanghai-based Global Risk Exchange (GRE)
2018 https://www.digfingroup.com/gre/ to develop a blockchain-based solution to let agriculture producers
Shanghai- protect against extreme-weather risks, among other solutions.
62
based Global
Risk
Exchange
Fusion 24 April, https://www.finastra.com/news- P R Finastra’s Fusion LenderComm is now live.
LenderCom 2018 events/press-releases/finastras-fusion- It is an app on R3’s Corda platform. Finastra worked closely with banks
mm lendercomm-now-live-based- to develop it.
63
blockchain-architecture The application will streamline information exchange between agent
banks and lenders in the syndicated loan market.

97
 Nuggets’ 19 April, https://distributed.com/news/uk- P R Nuggets, start-up focused on payment and identity, has been
China visit 2018 institutions-promote-nuggets- endorsed by UK’s dept. for international trade and city of London and
64 blockchain-project-secure-e- has been invited on visit to China.
commerce/
Payment and identity
Secruitize’s 27 April, https://www.forbes.com/sites/nguyen P C The company provides tokenized security
security 2018 james/2018/04/27/australian-
tokens investors-need-to-watch-
cryptocurrency-closely-even-if-theyre-
65
not-buying-it/#202a24987058

See more information below:

https://securitize.io
IntellectEU’s 2 May, https://distributed.com/news/intellect P I IntellectEU is launching Catalyst platform to connect business
platform for 2018 eu-launches-catalyst-platform- applications, financial market infrastructures and blockchain
financial integrate-distributed-ledgers-financial- networks.
services services/
66
Catalyst platform built for financial services industry

Connect business applications

BBVA issue 3 May, https://distributed.com/news/bbva- P R BBVA is first global bank to issue a loan using DLT
loan using 2018 indra-test-first-corporate-loan-using-
67 DLT blockchain/ 75 euro corporate loan in collaboration with Spanish technology
company Indra

J.P. Morgan 4 May, https://www.finextra.com/newsarticle P R J.P. Morgan filed a patent for the application of blockchain technology
files 2018 /32061/J.P. Morgan-files-blockchain- to speed up the process of cross-border payments.
blockchain to interbank-payment-patent
process J.P. Morgan believes smart contract platform Quorum has potential
68 cross-border to transform interbank payments business.
payments

International bank payments. Regulation focused.

98
 Vaultoro’s 4 May, https://finance.yahoo.com/news/vault I C The world’s first crypto-to-physical-gold exchange launched first
gold 2018 oro-bitcoin-gold-exchange- bitcoin exchange.
exchange implements-124718037.html

69

Monero 9 May, https://distributed.com/news/how- I C Monero is a cryptocurrency with a focus on private and censorship-
2018 blockchain-solutions-can-transform- resistant transactions.
Consumer payments-industry/
payments
70
see more information below

https://getmonero.org

Broadridge 11 May, https://www.finextra.com/newsarticle P R Broadridge, is a major provider of investor-related services. The

awarded 2018 /32090/broadridge-awarded- company was awarded a patent for applying blockchain technology
71 patent for blockchain-patent-for-proxy-voting to the proxy voting process. Proxy voting
proxy voting

HSBC world’s 14 May, https://www.cnbc.com/2018/05/14/hs P R HSBC issued a letter of credit for U.S. food and agriculture firm Cargill
first 2018 bc-makes-worlds-first-trade-finance- using blockchain. HSCB used a platform developed by blockchain R3
blockchian- transaction-using-blockchain.html called Corda.
based trade
72 finance The trade finance transaction involved a shipment of soybeans from
Argentina to Malaysia. The letter of credit was issued from HSBC to
ING.

99
 Harbor’s 18 May, http://fortune.com/2018/05/18/securi P C Harbor is a compliance platform for tokenizing securities including
tokenized 2018 ty-token-harbor-ceo/ real estate, investment funds, fine art.
secruities Habor raised $28 million from Andressen Horowitiz, Craft Ventures,
See more information below: Funders Fund, Pantera Capital, Signia
73
https://harbor.com

Tzero 22 May, https://www.reuters.com/article/brief P C Tzero and box digital markets joint venture to launch first security
2018 -tzero-and-box-digital-markets- token exchange.
anno/brief-tzero-and-box-digital-
markets-announce-joint-venture-to- More information on firm below:
launch-industrys-first-security-token-
exchange-idUSFWN1ST0K4 https://www.tzero.com

74 See below for more information:

On 22 December 2016 raised equity

https://globenewswire.com/news-
release/2016/12/22/901152/0/en/t0-
platform-successfully-employed-in-
the-world-s-first-public-issuance-of-a-
blockchain-equity.html
Nasdaq’s 24 May, https://business.nasdaq.com/marketin P R Nasdaq is discussing with SEB on applying blockchain in the Swedish
Sweden 2018 site/2018/MT/How-Blockchain-Will- mutual fund industry.
75 Mutual Revolutionize-Swedens-Mutual-Fund-
Funds Industry.html Mutual Fund

100
 Akamai and 29 May, https://distributed.com/news/akamai- P R Akamai and MUFG announced plans to offer a blockchain-based
Mitsubishi 2018 and-japanese-bank-mufg-developing- online payment with next-generation scalability and throughput.
UFJ Financial new-blockchain-based-payment-
Group network/ Online payment will support global network for processing credit
(MUFG) cards.

76 Note Akamai is world’s largest cloud delivery platform. Expected

released 2020 with support for current payment processing, pay-per-
use, micropayment and Internet of Things enabled transactions.

Online payment

Digital Asset 30 May, https://www.gmex-group.com/press- A I GMEX is a provider of services in financial markets and DAG is a
Group (DAG) 2018 release-digital-asset-group-and-gmex- financial service provider in the digital space.
and group-form-a-strategic-alliance/
GMEX Group The collaboration will involve the delivery of Exchange initiatives with
(GMEX) See below for information on DAG post-trade services including digital registry; Blockchain clearing
77 http://dag.global house; decentralised depository and custody; Digital and Crypto
Banking; Crypto Fund Management and emerging technology
incubation.

Post-trade
Paxos 31 May, https://uk.reuters.com/article/us- P C Paxos raised $65 million from investors including venture capital firms
funding 2018 crypto-currencies-paxos/blockchain- RRE Ventures and Liberty City Ventures
and-cryptocurrency-startup-paxos-
78 raises-65-million-idUKKCN1IW1RW Paxos is blockchain and cryptocurrency

101
 American 31 May, P R
Express 2018 https://www.americanbanker.com/ne Amex has built a distributed ledger that merchants can use to link
(Amex) ws/has-amex-found-a-data-gold-mine- card rewards to products they want to sell more off. e.g. burger place
79
with-its-rewards-blockchain want to sell more burgers can offer Amex reward points to make
items more appealing.

TrustToken 3 June, https://www.reuters.com/brandfeatur P C TrustToken created compliant stablecoin TrueUSD partnered with
and 2018 es/venture-capital/article?id=38316 HybridBlock, a cryptocurrency trading and education platform.
HybridBlock
to bring TrueUSD recently listed on Binance.
TrueUSD TrustToken raised $20 million, see HybridBlock will soon undertake a public token sale.
80 below:

https://uk.finance.yahoo.com/news/tr
usttoken-receives-20-million-funding-
220957845.html?guccounter=1

DESICO’s 11 June, https://www.newsXRP.com/press- P C ESICO will operate an in-built exchange. This exchange will provide
security 2018 releases/security-tokens-platform- immediate liquidity to any security tokens issued by any business
tokens desico-ranks-among-top-3-prestigious- listed on the DESICO platform, and be subject to the regulatory
ico-race-competition/ supervision of the Bank of Lithuania.

https://medium.com/@desico.io/desic Token crowd sale moved to November, 2018.

81
o-hailed-by-forbes-for-providing-step-
forward-for-the-global-crypto-
ecosystem-a8c92c50bd15

See more information below

https://www.desico.io/en

102
 Tether’s https://www.reuters.com/article/us- P C Tether converts cash into digital currency. There is evidence that
manipulation cryptocurrency-tether/cryptocurrency- Tether, may have been manipulating the price of bitcoin.
of bitcoin tether-used-to-boost-bitcoin-prices-
82 prices study-finds-idUSKBN1J92U0

OneGram’s 15 June, https://onegram.org P C OneGram is a Shariah-compliant FinTech start-up. OneGram uses

blockchain 2018 blockchain technology to create a new kind of cryptocurrency, where
each coin is backed by one gram of gold. First transaction on the
83 OneGram blockchain has been made and validated at the end of
Ramadan, in Dubai June 15, 2018

Akropolis’s 16 June, https://www.reuters.com/brandfeatur P C Token sale of 900 million in the 3rd quarter of 2018. Akropolis are
ICO 2018 es/venture-capital/article?id=39518 looking to be the largest smart contract-based pension fund
infrastructure on the blockchain.
Pension fund See more information below:
84
https://akropolis.io

BN Amro 19 June, https://www.waterstechnology.com/tr P R BN Amro Clearing, EuroCCP, Euroclear and Nasdaq completed a joint
Clearing, 2018 ading-floor- proof-of-concept to make the transfer and processing of collateral
EuroCCP, technologies/3705816/banks-and- used to meet margin calls more efficient, by using distributed-ledger
Euroclear bourses-join-forces-on-blockchain- technology (DLT).
85 and Nasdaq drive
joint proof- This is buy-side. Technology from Chain is used.
of-concept

103
 UTRUST 21 June, https://www.reuters.com/brandfeatur P C Pundi X’s market-leading blockchain-based point-of-sale solution
partner with 2018 es/venture-capital/article?id=39928 provider. UTRUST is the first cryptocurrency payments platform in the
Pundi X world to implement consumer-focused cryptocurrency solutions,
86 including buying and selling cryptocurrencies. Deal to promote
cryptocurrency payments in stores and secure them with consumer
protection.

Digital Asset 22 June, https://coincentral.com/digital-asset- A R Digital Asset is working on projects including with Australian
2018 holdings/ Securities Exchange and Swiss SIX Exchange on how stock exchanges
conduct and record financial transactions.
More information on digital asset
87
below: For instance, Australian Securities Exchange suggested they will go
live in 2020 with the platform.
https://www.digitalasset.com

Ant Financial 25 June, https://uk.reuters.com/article/us-ant- P R AlipayHK, Hong Kong based joint venture of Ant and CK Hutchison
launch 2018 financial-strategy/ant-financials-hong- Holdings will allow real-time transfers of cash between individuals in
blockchain- kong-venture-launches-blockchain- Hong Kong and the Philippines, in a digital wallet service –first of its
88 powered based-remittance-service- kind globally
cash idUKKBN1JL143
remittance Real-time transfers of cash
(Hong Kong)
People’s 26 June, P I The Digital Currency Research Lab at the People’s Bank of China
Bank of 2018 https://cointelegraph.com/news/peop (PBoC) has filed a new patent with China’s State Intellectual Property
China’s le-s-bank-of-china-files-patent-for- Office (SIPO) on Friday 22, June, 2018.
digital digital-currency-wallet
currency Digital wallet could be used to track transaction data in coordination
89
wallet with a centralized digital currency issuance registration agency.

Digital
Currency

104
 Slice Market 26 June, https://www.prnewswire.com/news- P R Slice Market is the first blockchain-based REIT for investors around
and 2018 releases/real-estate-investment- the world.
StraightUp platform-straightup-announces- Slice Market pools together small investments to enable investors to
merger-with-slice-a-blockchain- invest without huge capital. The investors earn dividends.
powered-platform-for-cross-border- StraightUp is a real estate equity platform that allows investors to
90 Real estate investors-300671917.html participate in New York real estate.

See more information below:

https://slice.market
https://www.straight-up.com

OTC 27 June, https://otcxn.com/wp- P C OTCXN is a blockchain-powdered capital markets infrastructure. It

Exchange 2018 content/uploads/2018/07/OTC- completed its first live trade. This exchange is a tokenized US Dollars
Network Exchange-Network-Completes-Live- and tokenized Bitcoin between two separate trading accounts over
(OTCXN) Test-Trade-of-Fiat-and- an electronic trading platform. The assets are held at a neutral
Cryptocurrency.pdf custodian and digitized on blockchain.
91
OTCXN delivers an institutional P2P trading platform. Pooled liquidity
from multiple exchanges.

Thomas 6 July, https://distributed.com/news/analysis P I Thomas Reuters’ BlockOne ID (released in Sep. 2016) for Ethereum is
Reuters 2018 -thomson-reuters-blockchain-baby- an identity-mapping service for blockchain, allowing digital identities
BlockOne ID steps-are-significant/ to be mapped onto Ethereum addresses.
for Ethereum
92 BlockOne IQ BlockOne IQ (released Jun. 2018) is an oracle service to deliver data
to smart contracts. Service supports Ethereum, R3’s Corda but more
Identity- is likely in the future.
mapping
service
Citrusexchan 10 July https://www.finextra.com/newsarticle Canadian start-up Citrusexchange launches blockchain-based supply
ge, invoice 2018 /32366/citrusxchange-launches- and invoice financing.
93
financing blockchain-based-supply-chain-
financing-platform

105
 Otonomos: 13 July, https://distributed.com/news/will- P C Otonomos provides owners with mechanism to form offshore
Blockchain 2018 blockchains-reshape-corporate- corporations in places like Cayman Islands, to transfer equity peer-to-
chartered entities/ peer to attract co-founders, pay collaborators, garner crowdfunding
94 company etc.
https://otonomos.com
First blockchain chartered company

Workchain.io 13 July, https://medium.com/workchain-io/a- WorkChain.io uses blockchain to automate payroll making it instant
2018 look-inside-the-workchain-io-protocol- and real-time.
95 286225e13f69

P C Mastercard obtained a patent from U.S Patent and Trademark on July

MasterCard’s 23 July, https://www.fool.com/investing/2018 17, 2018 that would provide for linkage of blockchain-based assets to
patent 2018 /07/23/mastercard-secures-a- fiat currency accounts. The patent creates a hybrid system where
potentially-game-changing-cry.aspx blockchain currencies can be used on traditional payment platforms.

See information on general area (7 July, Update below 10 August, 2018

96
2018) ‘Stem Theft’
https://siliconangle.com/2018/08/10/patents-apis-show-
Payments https://www.nasdaq.com/article/mast mastercards-earnest-embrace-blockchain-tech-guestoftheweek/
ercard-is-looking-to-stem-theft-
through-blockchain-technology-
cm988015
Landesbank 27 July, https://distributed.com/news/schuldsc P R Landesbank Baden-Wuttembrg’s issued a $114 million loan to Dainler
Baden- 2018 hein-and-blockchain-powered- AG via blockchain.
97 Wuttembrg’s transactions/ Shuldschein loans have fewer regulations that sometimes make
loan blockchain-based transactions difficult.
(Germany)

106
 Banks test 30 July, https://uk.reuters.com/article/us- P I Nine financial institutions (including Barclays PLc and Citigroup Inc)
blockchain 2018 banks-blockchain/cls-ibm-and-banks- and foreign settlement provider (i.e. CLS), IBM are testing
app store test-blockchain-app-store- LedgerConnect that will offer apps in areas such as customer
idUKKBN1KK0VI compliance checks, sanctions screening and collateral management.
98 LedgerConne
ct

Customer
compliance
Hedera https://venturebeat.com/2018/08/01/ Hedera Hashgraph raises $100m via token sale from institutional
Hasgraph hedera-hashgraph-raises-100-million- investors to create a new network based on its hashgraph consensus
for-fast-and-secure-blockchain- technology
alternative/
99

JD.com’s 20 https://www.thedrum.com/news/201 P R JD Blockchain Open Platform will enable customers to track the
blockchain August, 8/08/20/jdcom-launches-open- movement of goods and charity donations. It will ensure authentic
technology 2018 blockchain-technology-platform certifications, property assessment, transaction settlements, digital
platform copyrights. Note that JD a leading online retailer for consumer finance
applications.
100 (China)

Consumer
finance

Shanghai 22 https://cryptovest.com/news/shanghai P R Shanghai Stock Exchange partnered with Insurance Asset

Stock August, -stock-exchange-to-bring-blockchain- Management, Association of China, Changiang Pension Insurance
Exchange 2018 in-assets-pension-funds/ Company, Tokyo Maritime Sunshine, Sumitomo Mitsui Marine and
101
(SSE)’s others to build a distributed data platform. SSE is looking to bring
partnership blockchain to asset management and pension funds.
with

107
 insurance
companies

(China)

Asset
managemen
t
World Bank’s 23 https://uk.reuters.com/article/uk- P R First public bond using only Blockchain in a A$100 million deal.
blockchain August, worldbank-cba-blockchain/world- Commonwealth bank is the sole manager of deal.
bond 2018 bank-launches-world-first-blockchain-
bond-idUKKCN1L80DZ
World bank will manage Bond-I which is a two year bond using a
102
https://distributed.com/news/world- permissioned blockchain based on Ethereum.
bank-issues-79-million-bond-
permissioned-blockchain/

Swarm 30 https://financialit.net/news/blockchai P C Swarm (blockchain private equity firm) released Market Access
August, n/swarm-announces-market-access- Protocoal (MAP) for tokenized security trading.
2018 protocol-map-security-token-trading
Tokenized
103 security See below for more information:
trading
https://swarm.fund

Foxconn 4 https://www.bankingtech.com/2018/0 A R Foxconn and friends form $100 million venture capital fund in US.
Septemb 9/foxconn-and-friends-form-100m-vc- Advocate Aurora Health, Northestern Mutual, Johnson Controls and
(Chinese er, 2018 fund-in-us/ Foxconn will contribute $25 million each.
104 producer of
Apple’s The fund is looking to develop products and services for financial
iPhone) services among other sectors.

108
 Note that Foxconn is involved in supply chain finance.

The 12 https://www.theinstitutes.org/about- A R The Institutes RiskBlock Alliance is a blockchain consortium that

Institutes Septemb us/media-center/articles/institutes- represents 31 risk management and insurance companies.
RiskBlock er, 2018 riskblocktm-alliance-launches-canopy-
Alliance risk-management-and They launched Canopy a blockchain framework using Corda
blockchian platform.
105 Risk Nationwide tests RiskBlock, a
managemen product.https://www.insurancejournal
t and .com/news/national/2017/12/27/4753
insurance 46.htm

Komgo 26 https://www.gtreview.com/news/finte Komgo, based on Quorum (version of Ethereum) aims to make

Septemb ch/major-commodity-players-to-bring- commodity operations more efficient.
er, 2018 blockchain-platform-into-production-
106
this-year/

HSBC India 5, https://www.finextra.com/pressarticle HSBC India and ING Bank Brussels blockchain trade finance
and ING Bank Novembe /76237/hsbc-and-ing-carry-out- transaction with Reliance and Tricon Energy. Executed on R3 Corda
Brussels r, 2018 blockchain-trade-finance-transaction program.
107
Trade
Finance

Signature 5 https://www.pymnts.com/news/b2b- NY-based Signature Bank has approved NY State Department of

Bank Decembe payments/2018/signature-bank-real- Financial Service for its real-time blockchain-based payment platform.
launches r, 2018 time-blockchain-corporates/
blockchain
108 real time
payments https://www.ledgerinsights.com/signa
ture-bank-launches-blockchain-real-
time-payments/

109
109

110

Broadridge Decembe https://www.ledgerinsights.com/broa Broadridge in November 2018 finished blockchain proxy voting proof
blockchain r, 2018 dridge-execute-blockchain-proxy-poc- of concept (PoC) in Japan.
proxy PoC in in-japan/
111
Japan

FINTEUM 29 https://www.euromoney.com/article/ FINTEUM and R3 working together as they see DLT as ideal solution
January, b1cqvzxf1vv71v/dlt-perfect-solution- to deliver real-time liquidity management.
2019 to-deliver-real-time-liquidity-
112
management

HIS Markit, 30 http://www.cobaltdl.com/ihs-markit- HIS Markit announced that MarkitSERV and Cobalt are collaborating
MarkitSERV January teams-with-cobalt-to-re-engineer-fx- to accelerate delivery of new post-trade processing services for
and Cobalt’ 2019 post-trade/ foreign exchange markets.
113
FX work
HIS Markit has integrated Cobalt post-trade FX blockchain with its
platform

110
 LSE, March, https://www.ledgerinsights.com/londo LSE invests in blockchain Nivaura.
blockchain, 2019 n-stock-exchange-blockchain-nivaura/
Nivaura Nivaura worked with Allen & Overy.
114

IBM world 18 https://www.forbes.com/sites/rachel IBM launches a blockchain World Wire which is a blockchain based
wire March, wolfson/2019/03/18/ibm-launches-a- global payments network using Stellar protocol (Cryptocurrency).
2019 blockchain-based-global-payments-
network-using-stellars-
cryptocurrency/#2f38613a53ec
Network
115 payments
See more information on IBM world
wire

https://www.ibm.com/blockchain/solu
tions/world-wire
Deutsche March, https://www.ledgerinsights.com/block Deutsche Börse, Swisscom and one of its IT providers Sygnum plans
Börse, 2019 chain-deutsche-borse-swisscom- to launch digital asset exchange this year.
Swisscom sygnum-digital-asset-exchange/
116

SWIFT March, https://www.ledgerinsights.com/swift- SWIFT launches DLT e-voting PoC in the Asia-Pacific region.
blockchain 2019 blockchain-proxy-voting/
for proxy
117 voting
6 March, https://www.swift.com/news-
2019 events/press-releases/swift-launches-
dlt-e-voting-poc

111
 Thai stock March, https://www.ledgerinsights.com/thai- Thai stock exchange plans a digital asset platform to go live in 2020.
exchange 2019 stock-exchange-set-digital-asset-
plans blockchain/
118

Stuttgart March, https://www.ledgerinsights.com/digita Stuttgart stock exchange, Axel Springer, and finanzen.net plans a joint
stock 019 l-assets-blockchain-boerse-stuttgart- venture to construct a digital asset platform.
exchange axel-springer/
119
and Axel
Springer

Klienwort April, https://www.ledgerinsights.com/socie

Hambros 2019 te-generale-kleinwort-hambros- Societe Generale’s Kleinwort Hambros announced a blockchain note
enterprise-blockchain-investment/ (Luxembourg exchange traded note) which will invest in blockchain
120
related stocks.

Northern April, https://www.ledgerinsights.com/north Northern Trust incorporates legal contracts and smart contracts into
Trust , legal 2019 ern-trust-blockchain-private-equity- its private equity administration
contracting smart-legal-contracts/
121
and private
equity
blockchain
Baton 15, April, https://www.batonsystems.com/2019 Baton’s (DLT post-trade and payments) wins award for its innovative
Systems 2019 /04/15/baton-systems-wins-best- work on the sell-side. The company is working with Citi banks, CME
distributed-ledger-technology-project- etc. for settlement of margin collateral and foreign exchange.
122
at-sell-side-technology-awards/

112
 Accenture, April https://www.ledgerinsights.com/block Accenture, Generali launch blockchain-based reinsurance service for
Generali, 2019 chain-captive-insurance-generali- capitves. Solution uses R3’s Corda.
Launch accenture-employee-benefits/
123
blockchain

EY plans April, https://www.ledgerinsights.com/ey- EY plans to enable private transactions on Ethereum.

secure 2019 to-launch-privacy-tech-for-enterprises-
private to-use-public-blockchains/
124
transactions
on public
blockchain

113
Appendix 2: the legal and regulatory treatment of ‘crypto assets’.
In this appendix, we discuss the law and regulation of crypto assets.

A. What are crypto assets?

What are crypto assets? There is no standard or even widely accepted definition. Our working
definition of a crypto asset is as follows

Definition A: a crypto asset is a native ledger asset on a blockchain which can be

transferred between network participants and is widely exchanged on crypto
exchanges at a prevailing market prices, either for other crypto assets or for
conventional state fiat money.

This is a deliberately narrow definition. The reference to “native ledger asset on a blockchain”
and to “widely exchanged at prevailing market prices” excludes what others might regard or
claim to be crypto assets:

• It is restricted to ‘native assets’. These are a numerically limited set of ledger entries
that with holders identified by public and matching private key, and transferred from
one holder to another with the private key initiating the transaction and the public key
used to identify the recipient. They are native because they cannot be transferred off
the ledger. They do not represent anything else and there is no market maker or other
institutional arrangement to guarantee an exchange value against other crypto or non-
crypto assets.

Under this definition so called ‘stable coins’ – similarly transferrable ledger entries with
a guarantee of value in terms of conventional state fiat money or some other physical
or financial asset – are not crypto assets. This is because they are not native assets to
their supporting blockchain – instead the guarantor takes them off or adds them to the
supporting blockchain exchanging against their underlying asset to maintain their
guaranteed value.

• It is restricted to blockchains i.e. unpermissioned distributed ledgers in which a real-

world identity is not required for network participation and holding of the assets.

• It excludes some assets that purport to be crypto assets, but are not actively traded –
for example on this definition the ‘Petro’, the virtual currency created by the Maduro
government of Venezuela, is not a crypto asset because it is not traded on
cryptocurrency exchanges

Why such a narrow definition? This is for two reasons:

1. We choose this definition in order to limit crypto assets to assets traded in the
‘ecosystem’ of crypto-exchanges that has emerged for online exchange of
cryptocurrencies for fiat currencies and cryptocurrencies for other crypto assets. A
defining feature of a crypto asset is that it is traded on a number of these exchanges.

114
 If it is not so traded then it is best regarded as akin to a limited-edition work of art,
not in any way a financial asset.152

2. Our definition is framed to include only native blockchain assets i.e. those assets
which pose the most substantial challenge for existing law, regulation and
accounting. When an asset traded on a crypto exchange is not native to a blockchain
but is instead a representation of an external financial or physical asset, then there
is relatively little difficulty in applying conventional existing law, regulation and
accounting. There are still concerns, associated with asserting legal rights and
obligations when ownership is anonymous i.e. in a ‘permissionless’ blockchain
where participants need to have real world identities. But aside from anonymity of
ownership, such blockchain assets are not in any substantive way different from
conventional assets.

We will not attempt a full discussion of the rapidly changing landscape of crypto exchanges.
There are more than two hundred crypto exchanges worldwide trading several thousand trading
pairs (cryptocurrency against fiat, cryptocurrency against other crypto assets). 153 The services
offered vary substantially: some focused more on novice investors dipping into the world of
crypto assets, others catering for more sophisticated traders looking to do active trading
between crypto assets; some focusing on exchange of cryptocurrencies for conventional fiat
currency and others on exchange amongst crypto assets. Liquidity is an issue, apart from a few
standard trades such as Bitcoin XRP against US dollar USD it can be difficult trade even low
quantities of many crypto assets at low cost without impacting on market prices and exchange
prices for trading pairs can vary markedly from one venue to another. In order to provide liquidity
most of the more active exchanges operate in a centralised fashion, maintaining holdings of both
fiat and crypto assets on behalf of customers and hence putting customers at risk if they were to
fail.

We do though need to highlight regulatory concerns about crypto exchanges. There are
substantial differences between them in terms of both their transparency of their operations
and the extent to which they engage with regulatory authorities and comply with regulations.
There are also questions about the real nature of the exchanges reported by these exchanges. It
appears that much of the apparent volume are not trades between independent buyers and
sellers, but rather artificial trades generated by the exchanges themselves, perhaps in order to
climb published rankings of exchange volume. 154

152
Examples of excluded assets are ‘cryptokitties’, cute if rather crude virtual cat images. Cryptokitties are unique
items in the sense that blockchain based transactions establish unique ownership of each cryptokitty. They can be
freely copied but each has only one owner. They are not exchange traded so, by our definition, they are not crypto
assets.
153
Well established exchanges offering narrow spreads and liquid trading in Bitcoin include Coinbase, Kraken,
Bitstamp, Bittrex, Poloniex and bitFlyer.
154
As of 23rd March 2019, https://coin.market/markets/info reported 236 exchanges with 24h volume of $8.9bn
on 8,387 crypto trading pairs. However, analysis presented to the SEC by Bitwise Asset Management (in the
context of their case for launching a Bitcoin ETF), suggests that 95% of this reported volume is either fake or non-
economic (Bitwise Asset Management 2019). This implies that genuine daily trading volume is less than $0.5bn per
day compared with the daily $5.1trillion of global foreign exchange trading reported in the most recent April 2016
BIS triennial survey of foreign exchange i.e. crypto asset trading is less than 0.01% of global foreign exchange
trading.

115
Within the overall category of crypto assets, we follow recent regulatory reports, distinguishing
three different sub-categories of crypto assets (there is an overlap, a particular asset may offer
both the prospect of future payments and future products or services, i.e. be included in both 2.
Or 3.): 155

1. Cryptocurrencies: a native ledger asset on a blockchain which can be exchanged or

transferred between network participants – but offers no other benefits.

2. Crypto securities: a native ledger asset on a blockchain which, in addition, offers the
prospect of future payments - for example a share of profits.

3. Crypto utility assets: a native ledger asset on a blockchain which, in addition, can be
redeemed for or give access to some product or service.

Here by a ‘native asset’ we mean a claim that can be transferred on the ledger but cannot be
moved off or onto the ledger, and if used in exchange for products or services only through the
execution of software coded into the ledger.

Issues in the second or third categories are commonly referred to as “ICOs” or initial coin
offerings. ICOs – because they make a promise of some future payment or service – are
conceptually distinct from cryptocurrencies. The promise is made by some issuing or sponsoring
enterprise, which is providing or at least plans in future to developing some online business or
service. The use of the term ICO is a conscious analogy with conventional IPOs or initial public
offerings of publicly traded equity. ICO issues – of which there were many in the second half of
2017 and the first half of 2018 seeking to take advantage of the speculative rise in the values of
Bitcoin and other crypto assets – have in some cases provided quite substantial funding for
enterprise development.

The sponsoring entity for an ICO may be a legal entity – in which case the usual mechanisms for
enforcing applicable financial regulation such as fines may be used. It may though on occasion
not have any clear legal status. It may never be known which individuals have created the
software supporting the asset offered in the ICO and have persuaded crypto exchanges to
provide a venue for its exchange against other crypto assets.

The software supporting the ICO can be a self-standing “virtual enterprise” or “decentralized
autonomous organization” or DAO, functioning like an enterprise but with almost no institutional
arrangements. To those not steeped in the world of crypto assets this may seem far-fetched, but
this possibility has been a central issue in the world of cryptocurrencies, especially for users of
the Ethereum software and its cryptocurrency Ether. A focus of the Ethereum community has
been on supporting the development of decentralised autonomous organisations or DAOs,
arrangements for the release funding for a specified project or projects following an initial ICO.156
A DAO protocol has been developed that allows for the ‘entrepreneurial team’ i.e. those

155
For example (Bank of England, Financial Conduct Authority, and HM Treasury 2018; ESMA 2019; EBA 2019) and
also (Hacker and Thomale 2017).
156
The very first Ethereum DAO was hugely problematic, aimed at providing an automated system for venture
capital funding, it succeeding in attracting some 15% of all outstanding Ether, but a hack (associated with the
interface with fiat currency, not internal to Ethereum) allowed a substantial proportion of these funds to be
diverted and lost. Dispute over how to resolve this situation led to the hard fork between Ethereum and Ethereum
Classic. See (del Castillo 2016).

116
responsible for bringing a project to the DAO to request funding and to trigger a vote amounts
ICO holders on whether or not to approve allocations of funds. 157

While such decentralized organization seems workable for relatively simple decisions (e.g. fund
or not fund), and there have been efforts to extend the concept; it is unclear that this can be
used to support much more sophisticated decision making. 158 From our perspective, we would
emphasize again the challenge of data management. If the only decision is allocating funds to
nominated outside projects then the ‘direct democracy’ of the Ethereum DAO structure looks
workable, but it is questionable whether more complex decisions over transfer of assets or
processing of data can easily be decided by voting amongst ICO holders. To date the issue of ICOs
by virtual enterprises or DAOs is a highly niche issue that need not trouble the world of
mainstream finance.

What is of real concern is the lack of regulation of ICOs when compared to public securities. As
a result many have been based on misinformation about the prospects for the issuing enterprise
and in some cases have been fraudulent with no underlying profit stream or business service.159

B. Legal and regulatory classification of crypto assets

A major issue for regulators dealing with crypto assets is determining whether they fit within
existing regulatory classifications and are therefore subject to existing regulation. We review
how this issue has been addressed in the US and in Europe, focusing on what we define as crypto
assets, i.e. native blockchain assets that are traded on crypto exchanges.

In the US this question has been addressed by the Securities and Exchange Commission (SEC)
and the Commodities and Futures Trading Commission (CFTC). A central question is whether
crypto assets are securities (and therefore regulated at federal level by the SEC). Legal precedent
has established the Howey test – from the SEC v. W.J. Howey Co. Supreme Court case of 1946 –
as the standard for determining whether an asset is a security. According to this test an asset is
a security if there is an affirmative answer to four component questions: (i) is it an investment?
(ii) is there an expectation of profit? (iii) is there an investment in a common enterprise? and (iv)
do profits come from a promoter or third party? If a crypto asset is a security then the further
question arises of how the issue should be registered with the SEC, in order to adequately inform
potential investors.160

The SEC has been active in developing an appropriate regulatory regime for crypto assets,
concerned to both support new avenues for raising of capital but at the same time provide
adequate investor protection and enforcement action when required. 161 What we term above
“crypto securities” i.e. ICOs that offer a future profit are clearly securities under the Howey test.
They do not need to be issued by a legal entity. On July 25, 2017, the SEC determined that tokens
sold by a “virtual organisation” or DAO qualified also as securities.162

157
See (DAOX team 2018)
158
See (Shavit 2018) for discussion.
159
The most notorious example being OneCoin whose promises of ‘get rich quick’ apparently fooled
unsophisticated investors into parting with several billion dollars worldwide, see (Maina 2019)
160
See https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading .
161
See (Clayton 2018) and https://www.sec.gov/ICO . There have been numerous SEC enforcement actions and
lawsuits on ICOs in the US (Carlson and Selin 2017) which centre on their classification as securities. For instance,
the actions surrounding the Tezes ICO which raised $232 million in July 2017 for Dynamic Ledger Solutions (DLS).
The lawsuit alleged that the issued “Tezzies” are securities.
162
https://www.sec.gov/news/press-release/2017-131

117
Cryptocurrencies – our first category of crypto asset – may also be considered as securities if
their promotion is based on raising funds and the subsequent success of a “common enterprise”
(in the wording of the Howey test). A difficult question, on which the SEC has not yet reached a
clear determination (and could in any case be subject to legal challenge) is whether
cryptocurrencies that are associated with a ‘common enterprise’ and have been sold to investors
are securities. Former CFTC chair Gary Gensler has argued that on these grounds Ripple Lab’s
cryptocurrency XTC, and possibly also Ethereum Foundation’s Ether, should be treated as a
securities.163 This is a difficult decision with possibly disruptive impact on the nascent market for
crypto assets that the SEC seeks to support.(Baker 2018)

If not securities, then what? The CFTC have stated that they regard virtual currencies as
commodities, giving them the same regulatory authority under the commodities exchange act
as they have over physical commodities such as gold or copper. 164 This gives the CFTC authority
to investigate and sanction fraud and manipulation in spot and derivative markets for virtual
currencies and in addition to impose a range of regulatory requirements on trading of virtual
currency derivatives e.g. forward or future contracts.

The classification of crypto assets, including cryptocurrencies, has been less of a concern for the
Federal Reserve or other US banking regulators. Their position can be described as “taking a
watching brief”, monitoring closely but not seeing as yet any substantial concern about crypto
assets potentially falling outside of their ‘regulatory perimeter’.165

Similar issues of classification of crypto assets arise in the EU, but here the response has naturally
depended on the rather different structure and content EU financial law and regulation.166 What
classifications are possible under EU financial regulation? They could be financial instruments

163
(Russo 2018). Some go even further: (Hazen 2018a) argues that all cryptocurrencies should be considered as
securities. Others interpret the SEC as viewing all ICOs are securities unless proven otherwise (Zinman et al. 2018).
However, it is important to note that although SEC uses the Howey test to determine whether an asset is a
security, it has not provided an official test for such classification (Henderson and Raskin 2018). (Henderson and
Raskin 2018) believes such a defined test would be beneficial. They propose a test which they call the “Bahamas
test” . The first part of the test determines whether a digital asset is decentralized and the second part of the test
determines whether there is the “expectation of profit”. (Hacker and Thomale 2017) highlight that resulting from
ICOs being potentially subject to securities regulation in the US, issuers have attempted to avoid securities
regulation by modelling them so as to restrict citizens from investing. In addition, the SEC v. Shavers, 2013 WL
402182 at *2 (E.D. Tex. Aug. 6, 2013) the district court determined that Bitcoin could be a security (this did not
exclude it being a currency) (Hazen 2018b) However, it suggested that the jury would make the final decision.
164
(Giancarlo 2018). There are a wide range of views. The (Internal Revenue Service 2014) suggests that it will
treat cryptocurrencies (Any currency that is not stamped on paper, on coins, metals, on physical objects etc.) as a
property for tax purposes. There are others who believe virtual currencies are a new asset class. (Zellweger-
Gutknecht 2018) argues that cryptocurrencies are assets with “rivalrous and excludable” data. The paper argues
that rules governing entitlement to assets deposited with a trusted party should be applied to this new asset of
“value data.” (Burniske and White 2017) from Coinbase and ARK invest argue that bitcoin qualifies for a new
asset class. The analysis finds that bitcoin adheres to investability but differs distinctly from other asset classes in
terms of “economic profile, price independence, and risk-reward characteristics.”
165
See for example (Brainard 2018).
166
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-reforms-and-their-
progress/regulatory-process-financial-services/regulatory-process-financial-services_en There is no EU wide
securities regulator: rather securities regulations are transposed into national law, from EU directives; at the same
time the Parliament and Commission may create regulations that apply across the EU. Supervision and
enforcement of national law and EU regulations is a national responsibility. In addition “level 3” authorities -- the
European Securities Markets Authority, ESMA, the European Banking Authority EBA and the European Insurance
and Occupational Pensions Authority, are responsible for advising EU authorities, preparing technical standards
and issuing guidelines for national authorities on the application of EU law and regulations.

118
under the Markets and Financial Instruments Directive (in the current version MIFIDII applicable
since January 2018). If so they might then be classified as transferable securities; and if not
whether they might instead be classified as ‘e-money’ under the e-Money directive of 2009.

MiFiD II defines both transferable securities and financial instruments. Transferable securities
include both bonds, equities and other securities traded on capital markets and also some traded
participations in collective investment schemes (but exclude money market instruments of
maturity of less than 12 months). 167 Financial instruments are a broader category, including not
only transferable securities but also money market instruments and a variety of derivative
instruments. Payment instruments (of which e-Money is one example) are defined as distinct
from financial instruments and covered by different directives, such as the Payment Services
Directive PSD and the e-Money Directive.

The classification of crypto assets are discussed in recent advice given by the European
supervisory authorities ESMA and the EBA to the European Commission.(ESMA 2019; EBA 2019).
ESMA has conducted a survey of EU national supervisory authorities, asking for their view on the
classification of six representative crypto assets. While the responses were not entirely uniform,
this survey makes clear that what we have classified above as “Crypto investments” i.e. offering
some prospective profit share or payment and traded on crypto exchanges – would be classified
as transferable securities by most EU national authorities. This outcome is very similar to the
position taken by the SEC and implies that they should meet with the requirements (broadly
equivalent to SEC registration and filing) such as the Prospectus Directive and the Transparency
Directive.

The EBA finds that, in some situations cryptocurrencies may qualify as e-money under EU law, in
which case the issuer is required to have authorization as an electronic money institution. 168 This
leaves though unresolved questions. The relevant legal definition in EU law is “stored monetary
value” but “monetary value” is not defined: does for example Bitcoin qualify as a measure of
monetary value? 169 Or is monetary value restricted to fiat currencies (in which case, according
to our narrow definition of crypto assets a crypto asset cannot be e-money)? Also, even if a
cryptocurrency i.e. a native blockchain asset is classified as e-money, it remains unclear how the
requirement for authorization could be applied to the open source software code supporting the
cryptocurrency blockchain. The EBA seem to be making a theoretical rather than a practical
recommendation.

C. Other regulatory concerns

We conclude this section with brief summary of other regulatory concerns about crypto
assets. 170 These are: their treatment for purposes of know your customer KYC and anti-money

167
As in Section C of Annex I of MIFID II, reproduced in the FCA handbook
https://www.handbook.fca.org.uk/handbook/glossary/G1519.html
168
(EBA 2019) paras 23. And 24.
169
This is a difficult legal question to which the answers can vary. While most central banks and regulators take the
view that cryptocurrencies are not money, the German Federal Financial Supervisory Authority (BaFin) suggests
Bitcoin is a unit of account and is therefore money (Demertzis and Wolff 2018). (Omlor 2018) argues that Bitcoin
should not be classified as money for legal purposes as it is not considered as a universal medium of payment nor
there is ‘normative recognition of bitcoins in German law’. On the other hand the risks of bitcoin obligations are
similar to what one would expect in monetary debt and a debtor can repay a bitcoin debt in euros under German
law suggesting it is money.
170
See the various regulatory documents cited here and also (Board 2018) .

119
laundering AML regulation; ensuring market integrity on venues for the trading of crypto assets;
oversight of fiduciary responsibilities of custodian institutions and wallet services; and potential
prudential and financial stability concerns arising from holdings of crypto assets by banks and
other regulated institutions. In writing this we are aware that the G20, under the current
Japanese presidency, is making regulation of crypto assets a priority issue for international policy
co-ordination. New regulatory initiatives may emerge by the time of the June 2019 G20 summit.

A major challenge for regulators is the ‘pseudonymous’ participation and absence of institutional
governance structure in permissionless blockchains. These makes it all but impossible to identify
holders or enforce effective institutional responsibility and hence apply KYC and AML
requirements. The only effective application of KYC and AML regulation would appear to be at
the interface between the crypto assets and conventional financial system i.e. in the venues for
trade between crypto assets and fiat currencies. Virtually all regulatory authorities are stressing
the importance of effective KYC and ALM regulation for crypto exchanges – with increasing
scrutiny of the sources and uses of funds.

A closely related problem is with enforcement of regulations to promote market integrity and
prevent market abuse. Crypto assets do not have a clear status from the perspective of market
abuse regulation. 171 Even if this status is clarified, it is uncertain how crypto exchanges operating
entirely outside the regulatory perimeter can be policed.

How will this play out in practice? While the ‘eco-system’ of crypto exchanges is rapidly evolving,
there does seem an emergent separation between: those exchanges that seek to engage fully
with conventional financial institutions, offering exchange between fiat and crypto and ensuring
full compliance with applicable regulation; and other exchanges that seek offer a venue for
trading only in the alternative cryptocurrency world, that may operate entirely online for crypto-
to-crypto exchange and have little need to pay attention to financial regulation because the
regulatory authorities have no easy means for enforcing this regulation even when it applies. Still
regulators are likely to want to ensure strong enforcement of AML and other regulations on all
forms of crypto exchange. 172

There has been recent interest in the potential creation of regulated digital exchanges for trading
crypto assets. This include announcements by SIX, HQLAZ, TASE and ICE. SIX (owner of Swiss
Stock Exchange) aims to launch SIX Digital Exchange (SDX) mid 2019 using DLT to provide digital
asset trading, custody service and settlement. The goal is to ‘tokenize’ existing security and non-
bankable assts.(Ledger Insights 2018e) HQLAX was launched last year to make it easier for banks
to hold High-Quality Liquid Assets (HQLA).The first live trade was between Credit Suisse and ING.
Credit Suisse swapped a bundle of securities valued at EUR25 million.173 HQLAX is also working
with Deutsche Börse 174 on a Blockchain Securities Lending Platform. (Cointelegraph 2019b) Tel
Aviv Stock Exchange (TASE) Accenture and TheFloor (FinTech) is constructing a securities lending
blockchain.(Ledger Insights 2018d) The firms will utilize Hyperledger Sawtooth. Intercontinental
Exchange (ICE) (parent company of New York Stock Exchange) suggests it will spend an additional

171
As discussed by (Keidar and Blemus 2018)
172
See (Østbye 2018) for related analysis.
173
Digital Collateral Receipts represents the securities and is held with a third party. There is no need to securities
to move. HQLAX uses R3’s Corda technology. See below for more details
(Ledger Insights 2018f)
174
Deutsche Borse has been active on related project. In March 2019 , Deutsche Borse, Swisscom and Sygnum
announced that they will build a trusted digital asset ecosystem.
(Ledger Insights 2018c)

120
$20 million this year building Bakkt (bitcoin futures trading and custody platform). (Coindesk
2019c) Bakkt recently raised $182 million and will go for more funding (i.e. $50 million) over the
course of 2019.

This separation of crypto exchanges, between those either clearly inside and those clearly
outside the regulatory perimeter, also has implications for the regulatory responsibility for
ensuring market integrity. For those exchanges clearly inside the regulatory perimeter the task
is similar to that required for ensuring market integrity in securities trading, derivatives trading
and in foreign exchange, regardless of whether this trading takes place on formal exchanges or
in more loosely organized ‘over the counter’ markets. Regulators need to keep abreast of market
practice and be ready to take action against individual participants or co-ordinated efforts to
manipulate market prices or of conflicts of interest between brokers and clients. The existing
framework of regulation should apply and the challenge is collecting the evidence for effective
enforcement actions.

Existing regulations should also apply to those institutions providing custodian or wallet services
to holders of crypto assets or launching exchange traded or mutual funds investment in crypto.
The key issues will be transparency and also ensuring adequate arrangements to protect
investors in the event of operational or financial difficulties. We expect to see reputable firms
wanting to be situated clearly inside the regulatory perimeter to promote trust in their services.
In this case application should be comparatively straightforward.

There are at present only limited concerns amongst regulators about crypto asset transactions
leading to either prudential risk or financial instability. Conventional institutions, banks,
insurance companies have next to now exposure. Where trading and investment services are
offered, this is primarily as a service to clients not on a proprietary or market making basis. The
aggregate scale of crypto investment remains much too small to pose a real threat to financial
stability.

Suppose we are correct and crypto asset activity, both exchanges and custodian services,
separate into those clearly inside and those definitely outside the regulatory perimeter. This then
raises one final question, one on which we have no definite answer. What then will be the
relative importance of the two worlds of regulated and unregulated crypto assets exchange?
One possibility is that the desire to conduct financial transactions, both payments and
investments, outside of the framework of state regulation will allow both to co-exist. Another
possibility is that customer and investor demand for regulatory protection will drive most activity
within the regulatory perimeter. Whichever way this turns out, however, will have little impact
on regulatory policy making. Regulators can only regulate what they can regulate. An
unpermissioned crypto exchange that offers only exchange in crypto assets can put itself
effectively outside of conventional regulation (enforcement only possible through substantial
intervention in personal liberties, for example through seizing of computers and substantial
punishment for individual participation in prohibited unregulated financial activity).

What we do predict is that – in a decade or two from now – regulated crypto asset exchanges
will be effectively subsumed into conventional finance. There will likely be some limited
opportunity still for regulated transactions in unpermissioned native cryptocurrencies as a
distinct investment asset. But most regulated transactions will be in assets (on permissioned
blockchain i.e. distributed ledgers) that are essentially identical to conventional securities or
money (securities that just happen to be transacted using a permissioned distributed ledger

121
technology, or stable coins that represent either fiat money or actively traded commodities.) For
most purposes the distinction between crypto and conventional financial assets will disappear.

122
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