Banking technologists Martin Walker, Keith Pritchard and Professor David L Yermack debated the promise and realities of blockchain and distributed ledger technologies on a panel that opened the most recent Mapping the Financial Frontier Conference.
The conference was held at Federal Reserve Bank in Atlanta, and the debate was opened and chaired by former Federal Reserve Bank of Minneapolis senior research officer Warren Weber.
Weber began by citing a book he’d been reading and urged the audience to rouse still more curiosity about the phenomenon of blockchain given contentions in the book:
“I’ve been reading a book by [Michael] Casey and [Paul] Vigna called The Truth Machine. It’s about blockchains, and there’s a quote in there that says, ‘If the future foreseen by this book comes to pass, we’ll witness the biggest employment shake up the world has ever seen, and this time the most vulnerable jobs are…’ and then they list the ones that were vulnerable in the past. But today the most vulnerable jobs will be the accountants, the bankers, the portfolio managers, the insurers, the title officers, the escrow agents, and the trustees. So I hope that’s whetted your appetite for us to talk about blockchains.”
David Yermack kicked off the debate with about 20 minutes of prepared statements.
Yermack, a professor of finance and business transformation at NYU Stern School of Business, said he “offered the first university course in the world on cryptocurrency and blockchains…in conjunction with a law professor at NYU.”
Yermack stated that, however, one may feel about the subversive origins of Bitcoin, the tech has forced legacy banking to attention:
“So very famously, the first block of the Bitcoin blockchain, which was created on January 3, 2009, it has the headline from that morning’s Times of London, that the chancellor’s on the brink of a second bailout for the British banking system. And this is there really to announce to the world that there is a better way and to throw down a challenge to the existing financial system that we are going to put you out of business if you don’t adapt and recognize that there’s a better way to do payments and transfers.”
Yermack then described blockchain as a type of rightful heir to double-entry accounting that “makes it all but impossible to decrypt the blockchain and change the ledger because…if a thief goes in and tries to change one of the earlier entries—it will throw off not only that entry, but every future entry in the ledger from that point forward, so anybody looking at the ledger would be able to tell right away that something was wrong, and exactly the point where the problems begin.”
“In other words,” said Yermack “it’s really a self-auditing ledger.”
Yermack went even further stating:
“(B)itcoin has never been hacked in 10 years. It’s by far the most secure financial ledger that’s ever been created.”
“(N)ot only in finance, but in health care, and vital statistics, immigration, border security, almost any aspect of government or business where data integrity is important—could probably benefit from this technology.”
Yermack acknowledged that private finance is reluctant to adopt across-the-board transparent ledgers:
“(Y)ou know, the entire Swiss banking system is founded on this principle that privacy is valuable to people.”
He also admitted that universalized public ledgers or “open blockchains” might also run afoul of privacy legislation:
“(A)lmost every country has laws and rules about data privacy and protecting the identity and the behavior of your customers and so forth, and you would quickly violate those rules if you moved to an open blockchain, because everything is more or less laid open for people to look at.”
Banks should consider joining cryptographic settlement networks now available at JP Morgan and the Swiss bank UBS (that coin is called “utility settlement coin”), he said:
“One consulting firm looked at this when UBS rolled out their coin. They said that the net expense in this system is $65–80 billion a year globally, and they think they can save about $20 billion a year by transitioning to this settlement coin. So you’re talking about a savings of 25 to 30 percent.”
Behind the scenes, those savings will likely come at the expense of jobs:
“And the way you would really think of this is getting rid of 25-30 percent of the jobs in the back office, the people who keep ledgers.”
Yermack also claimed, “the highest value opportunity is in shipping and logistics, especially import-export, cross-border shipments, and remittances.”
30-year financial services technology veteran Keith Pritchard then spoke from his chair, stating he has worked the last two years “on secondment to the DTCC [Depository Trust & Clearing Corporation]…to help them look at how they might use blockchain distributed ledgers.”
Pritchard acknowledged that tech inspired by Bitcoin should be considered, but spent much of his talk downplaying claims of massive implications:
“I think there are always two questions we should be asking ourselves. First of all, is the capability that the blockchain brings: is that solving a problem that we have? … if we don’t have the problem, why do we bother?”
He also said blockchain should be made to prove itself against more workaday solutions:
“Second question to ask of that particular functionality: are there other ways, other technology, existing technology, that can solve it? Again: absolutely, yes…we sort of do a beauty contest and say, ‘Okay, which of these tools best solves that problem?'”
He also said many of the functions performed by blockchains can be achieved without them:
“To get a distributed ledger, you don’t have to have the blockchain to do it.”
He said banks would be happy to implement DLT/blockchain if it were really the best:
“Something like 2.8 billion [dollars], 3 billion [dollars], so 50-odd percent of their processing costs were to do with reconciliations.”
He also contended that the “reconciliation” performed by the DTCC has been derided in favour of the term “consensus,” but that the functions are the same:
“I think people have called it ‘consensus’ because the word “reconciliation” gets a bad rap. Consensus is reconciliation. So we send our results saying, ‘Here’s what I got, do we all agree?’ Yes, we agree. Right now we’ll commit that transaction to the database.”
Like several other blockchain detractors, Pritchard claimed it is a technology roving around looking for something to solve, but that “it’s solving a problem I don’t think we really have. It actually makes things worse. It makes it a lot more expensive, and a lot slower.”
He went further:
“The functionality that allows you to distribute processing power to the nodes I think is completely a technical capability looking for a solution, and really—and again, certainly I’ll talk about investment banking space—I have not come across yet a sensible use case where that’s applicable.”
He also offered to furnish “a diatribe” on smart contracts for any interested audience members.
“So for me, distributing functionality in the form of smart contracts…is completely pointless.”
All told, Pritchard said he leans skeptical:
“I’m sort of maybe two-thirds nearer the ‘it’s more smoke and mirrors than reality,’ but I do think there is some benefits in there.”
Martin Walker, director of banking and finance at the Center for Evidence-Based Management, also spoke in a sober manner regarding smart contracts:
“Smart contracts are just programs, written by the same kind of people, in the same kind of languages, with the same challenges as writing any other kind of program.”
In fact, said Walker “it can actually be harder to program business logic onto a blockchain-based system than conventional systems.”
Walker said years of research have led him to believe that centralization, not “decentralization,” usually better serves the resolving of matters in finance:
“(I)n capital markets, where I spent most of my career, particularly in processing trades, derivatives, effects, repo, et cetera, I did some very, very detailed analysis, I looked at exception rates, I looked at breaks, and the most effective way to get consistency and to reduce those breaks was actually more centralization.”
“(Blockchain’s) not a panacea,” he said, “because there are a few issues there—having the same programming logic replicated many times, operating on the same pool of data, is actually incredibly inefficient.”
He even used the term “distributed computing” in this case is something of a misnomer, as is comparing Bitcoin or similar systems to the Internet:
“Having a distributed ledger and blockchain actually goes in opposite direction to what we call ‘distributed systems,’ where different systems do different aspects of processing. That’s basically the concept the internet is based on.”
He also said that open-source software can be a liability in security:
“One of the most fundamental ways of actually making sure your system is secure, which is one failure to do [and] which causes a great deal of actual hacking, is keeping your software up to date…Now, blockchain-based technologies—you talked about cryptography, encryption—it comes with this aura of, ‘This must be secure, this must be really good.’ But when you actually look at where those technologies have come from in terms of general approach, it’s actually come from a really, really bad direction in terms of actually creating secure systems. It’s come from the view of you distribute data to everyone. It’s come from the perspective that once something’s done—you’re going back to Bitcoin, and Satoshi’s paper. He specifically designed a system which was irreversible.”
While irreversibility may work for risk-tolerant users of Bitcoin, the feature is less desirable in standard finance and banking, he said:
“This is one of the reasons why cryptocurrency exchanges are persistently being hacked. You need one piece of information, you can drain the account, and there’s nothing you can do to get the actual money back.”
He also said that, contrary to the hype, blockchain features are being shed:
“Blockchain-type technologies have evolved away by dropping blockchain-type features. Most of the enterprise-type blockchain systems do not actually distribute data to everyone participating anymore—particularly a few things like Fabric, Corda—and generally, ‘security’ has actually meant moving further away from the blockchain-type model…Corda…doesn’t even have blocks in it anymore.”
Walker explicitly took issue with the hype around blockchain:
“So, do I think, on a personal level, the level of hype around blockchain distributed ledger is a problem? Yes, I genuinely do, because it feeds into this belief—and you get it about every decade—that IT is a form of magic, and you just have to repeat the magic incantations—whether it’s blockchain, AI, machine learning—and everything is going to get solved, as opposed to, you actually have to think through problems and solve them.”
The panelists then participated in a Q&A session in which contentions were considerably nuanced. The Q&A material is a must read for seriously interested parties.
Keith Pritchard is an independent consultant in the investment banking technology sector. He has nearly 30 years of experience in financial services. He has held chief technology officer–level roles in major global investment banks and consultancies. Pritchard has spent most of his career in the derivatives and FX markets, and he has driven the use of innovative technologies to solve new or longstanding problems in the industry. Most recently, his focus has been on the roles that distributed ledgers might occupy in investment banking and, particularly, which of the various designs of distributed ledgers are best suited to the nature of the problems they face. He has written numerous articles on this topic, participating in and hosting panel events and workshops on distributed ledgers. Pritchard holds master’s and doctorate degrees in chemistry from the University of Oxford and is currently studying part-time at the University of Cambridge for a degree in archaeology.
Martin Walker is director of banking and finance at the Center for Evidence-Based Management. He is the author of the book Front-to-Back: Designing and Changing Trade Processing Infrastructure and contributed to the book Evidence-Based Management: How to Use Evidence to Make Better Organizational Decisions. He has published several papers on blockchain and cryptocurrencies. Walker is the former senior information technology manager at RBS Markets and Dresdner Kleinwort. He has provided evidence to the UK Parliament’s Treasury Committee on Digital Currencies. Walker received his master’s degree in computing science from Imperial College in London and his bachelor’s degree in economics from the London School of Economics.
Warren Weber was senior research officer at the Federal Reserve Bank of Minneapolis, a position he held for 27 years until his retirement in 2012. Prior to that, he held teaching positions at several universities. He is a visiting scholar at the Federal Reserve Bank of Atlanta and is affiliated with the Institute of Decentralized Economics. His research interests are payments systems; digital currencies, particularly stablecoins; monetary theory; and U.S. banking history. He holds a PhD from Carnegie Mellon University.