Barclays is one of several leading international banks that are exploring the potential for distributed ledger technology to transform a number of industry processes. In this interview, Dr. Lee Braine, one of the bank's experts on DLT, explains the bank's strategic approach to this new technology and the importance of collaboration in achieving its potential. He expects that it may take up to 10 years before DLT is deployed in complex processes such as securities clearing, but he says the potential benefits in terms of simplification, rationalization and risk reduction will be "significant and strategic."
Dr. Lee Braine, Barclays Investment Bank
MV: Barclays has adopted a public and structured approach to fintech, and blockchain in particular. What has driven this approach?
BRAINE: We have witnessed a real acceleration of fintech innovation in the past decade, with contributions from new startups, established technology companies and established financial companies. Much of this innovation has been inspired by startups, many of whom have chosen to partner with larger organizations. The startups’ propositions have ranged from incremental improvements to the radical reimagining of financial services. The more disruptive propositions are often initially viewed by incumbents through two lenses—as potential opportunities and/or as potential threats. For several years, Barclays has been actively engaging with fintech startups to identify opportunities for collaboration and co-creation, including via the Barclays Rise innovation hubs and the Barclays fintech accelerator program. Our experience with fintech has been very positive, permitting the bank to learn from innovative startups and permitting the startups to gain exposure to banking.
Barclays started exploring the topics of blockchain, distributed ledgers, smart contracts and digital currencies in 2014. In order to structure our approach, we produced a strategy in late 2015 to articulate our objectives, design principles, key use cases, and technology preferences (covering application themes, control/ownership models, intellectual property, network access models, trust models, and consensus models). This has allowed us to, for example, assess many incoming propositions against our agreed strategy. Collaboration and open innovation is at the heart of the strategy so, wherever appropriate, we look to also publicly share our experiments, research, learnings, and industry engagements in this innovative field.
MV: In which financial markets do you consider DLT can best be applied and what are you learning from your work in this area?
BRAINE: There are many potential applications of distributed ledger technologies. Given that a myriad of existing industry processes in financial markets could potentially benefit from increased standardization, simplification and rationalization, it is perhaps not surprising that many candidate use cases can be identified for distributed ledgers and smart contracts. There are good use cases in capital markets (including bonds), derivatives markets (including swaps, futures, etc.), over-the-counter markets, money markets (including commercial paper, repos, etc.), and the forex market. However, the challenge often comes when attempting to convert candidate use cases into viable business cases, taking account of the many relevant factors associated with specific proposals. Such factors can include the proposed governance model and service operator, the maturity of the distributed ledger platform, the scale of the required network effect, the existing degree of digitization, the effort required to integrate with legacy systems, possibly the forecast timeline to migrate off and decommission legacy systems, and so on. Compelling business cases can therefore be easier to construct if associated with a planned technology refresh/upgrade, or if providing new services/products, or if the potential benefits are significant and industry-wide.
For derivatives markets, it is reasonable to imagine a series of deployment stepping stones, starting with the go-lives of minimum viable products for initial use cases being available from perhaps late 2018 onwards.
MV: Part of your strategy was the establishment of the Whitechapel Think Tank, which provided a forum for regulators to address their approaches to blockchain. Has this forum proved successful and why are regulators important to the development of financial market applications for this technology?
BRAINE: The Whitechapel Think Tank was convened in December 2014 as a forum to build an understanding of the opportunities and challenges presented by blockchain and distributed ledger technologies. It is co-chaired by Jeremy Wilson, vice chairman of Barclays Corporate Banking, and John Edge, chairman of ID2020, a public-private partnership exploring the potential use of distributed ledger technology to create digital identities. The think tank has provided an open public and private sector forum since its first meeting in early 2015 which brought together the U.K. government, HM Treasury, the Bank of England, large corporates, and fintech startups. It has proved successful in providing a vehicle for governments, regulators and the private sector to consider issues arising in the emerging blockchain and distributed ledger ecosystem.
Regulators are key to the successful development of distributed ledgers within financial markets. With banks and market infrastructure firms researching and experimenting with distributed ledger prototypes, many regulators are interested in exploring where the balance of risk and opportunities may lie. Such exploration often includes dialogues supported by discussion papers and consultation papers. Further engagements can include providing regulatory sandboxes, which are supervised ‘safe spaces’ for businesses to test innovations such as applications of distributed ledger technology in the real market, with consumers. There is potential for regulators to foster innovation arising from regulated firms, technology providers and start-ups.
MV: How are you engaging with other stakeholders required for the successful application of this new technology, e.g. standards bodies, legacy operations providers, and market infrastructure?
BRAINE: As well as engaging with distributed ledger fintech start-ups via initiatives such as the Barclays Rise open innovation hubs and the Barclays Accelerator program, Barclays also engages with a wide range of other stakeholders on the potential applications of distributed ledgers. This includes trade associations, such as working with the International Swaps and Derivatives Association on the development of upcoming business process and data standards for derivatives smart contracts. This also includes market infrastructure, such as providing input to DTCC on its upcoming distributed ledger solution for post-trade processing based on its existing Trade Information Warehouse capabilities and interfaces. Collaboration is central to the success of such industry initiatives because of the network nature of distributed ledger technology.
MV: Finally, what does the timeline for wholesale adoption of DLT in derivatives markets look like?
BRAINE: It is helpful to think in terms of roadmaps when considering the adoption of distributed ledger technologies and this is particularly true in derivatives markets. There are many different aspects of the technology progressing in parallel. Examples include foundational topics (such as common reference data and common product taxonomies), candidate components (such as smart contracts permitting automated and standardized workflow, regulator nodes supporting more direct reporting, and shared logs of key events), and potential applications (such as digital cash instruments permitting instant settlement finality in fiat currencies, other asset classes on distributed ledgers permitting instant settlement for more complex transaction types such as delivery-versuspayment, etc.). The list of possible aspects is enormous and so it is essential to determine which subset of aspects is necessary when designing candidate solutions for specific business problems.
For derivatives markets, it is reasonable to imagine a series of deployment stepping stones, starting with the go-lives of minimum viable products for initial use cases being available from perhaps late 2018 onwards. But it will take many more years for the standardized business processes of smart contracts and the standardized data structures of distributed ledgers to mature and be implemented by platforms, and then broadly adopted and integrated by stakeholders. Industry surveys typically indicate timelines of one to five years for simpler derivatives products and five to 10 years for complex processing such as securities clearing and settlement with multilateral netting. So there is a long road ahead for the incremental implementation and application of this innovation, but the potential benefits in terms of simplification, rationalization and risk reduction are significant and strategic.