Welcome to today's webinar, Tradify's Blockchain Imperatives, Hard Truths in Financial Services.

I'm Ben Singerald, Product Marketing Director here at Digital Asset.

And I'm delighted to be playing host today as we delve into this.

Joining me today, we have Darm Kapadia from Equilend.

He's the Associate Director of OneSource Equilend.

He was really involved in the selection process when Equilend was evaluating the technology to support OneSource, which is Equilend's distributed ledger technology solution established to create a single security finance industry.

With us today, Darm, thanks for joining us.

Great to have you calling in live from DA in New York as well.

Alongside Dan, we have my colleague, Bernard Elsner, Chief Product Officer here at Digital Asset.

For 5 years, Bernard has been at the coalface with our teams building digital assets enterprise, smart contract platform, DAML, and our blockchain protocol Canton.

Hi Bernard, great to have you here today as well.

Okay, I think we'll go on to the, go on to your nice pictures for us Bernard.

maybe if I get going, no actually you're doing the next slides, I'm not sure Dom is on video yet.

So let's talk about the agenda today, Bernardo.

So first, we're going to recap a little bit today on the potential the blockchain can unlock for traditional finance and the value that we see our customers across capital markets and the FMI space getting out of this technology.

And then we're going to go into the detail exploring some more of the reasons why maybe wide scale adoption has not happened as quickly as some may have expected in tradfy.

And we're really going to delve into these 3 imperatives that we've been talking about.

So these are the 3 things we believe to enable organizations to access the full value and potential of the technology.

And then we're going to talk a little bit more about what we're doing at BA and with the Canton network to address these needs.

The format is going to be a bit different hopefully as we get Dharm back involved here.

But the idea is that Bernard will give us the theory and delve into the concepts a bit more of a technical lens.

And then we'll switch hopefully to Dharm to give that kind of business view and see how these concepts apply in the real world and how they apply to the Equirons use case.

We have Q&A, so please do share your questions as we go.

And other than that, we're going to get going, I think Bernard.

We're definitely getting back involved at some point and lots of content to cover.

Sorry we had a little bit of technical difficulties with the video.

I'm going to start with something that you might wonder why in such a webinar I even cover it, right?

Blockchain traditional finance, why even consider blockchain at all?

And I'm not doing this because I don't think all of you attending this webinar have a pretty clear idea already what blockchain technology is about or indeed what we want to use it for, but rather than I think to have real clarity of the core value proposition that blockchain offers traditional finance is key to really talk about the the imperatives in that main section of the webinar today, which are in part what's holding the adoption of the technology back today.

Despite all that, I want to start really on the positive note.

Despite all the crypto headwinds over the last year, enterprises, financial institutions are marching forward.

to 39% of the market going live with DLTs.

We're really moving out of the preparatory phases into production phase, into true adoption.

And what we're seeing is that the reasons for doing so, the reasons for adopting DLT and blockchain are fairly universal.

And I usually talk about just 2 core value pillars of blockchain technology.

The first 1 is the slightly, I would say, more down to earth 1, which is cost reductions, right?

Reducing operational and capital costs through the removal of end-of-day netting and reconciliation.

Almost all financial applications cross organizational boundaries in some way, meaning we need to coordinate workflows across institutions and applications.

And for those applications to then become real time, we need the right technology, right?

And traditional tech cannot solve this problem.

Only blockchain technology can, which is why in traditional finance, we almost always have workflow latencies measured in business days, essentially corresponding to the number of organizational hops we have to go through, each of which ends up in an end of day reconciliation process.

Now, this is, I think, where most of the current adoption comes from, but I actually don't believe it's the main draw of blockchain technology.

I think the main draw is the second value pillar, which we'll talk a lot more about today, which is the new market opportunities that blockchain opens by virtue of atomic application composability.

Really that seamless interoperability of applications, which allows a value to move in new ways.

Right, sort of Just a few very high level examples here.

What Equilend is doing, integrating an asset issuance platform, for example, a bond issuance with repo trading or set lending gives that asset.

Otherwise you can just buy it and hold it, right?

Mobilizing assets as collateral to allow you to utilize your assets better, gives them more utility.

Connecting lending and execution markets without settlement risk, right?

Lower risk, higher liquidity gives assets more utilities.

All this is really where value gets unlocked.

And the easiest way, I think, to see that power of connectivity, that application interoperability is what really unlocks the value, is the simplest of all blockchain applications.

DVPs, delivery versus payments, which are really the killer app for blockchain, right?

And this beautifully illustrates both of the value propositions.

What we need is some sort of delivery asset, say bond issuance registered at the CSD or some such institution.

We need a payment asset, stable coin, banknote, whatever that we want to pay for.

And a DVP is really just the ability to exchange these 2 against each other without counterparty risk, without settlement risk.

So we have the first value proposition, the real-time synchronization and transparency of ownership for the 2 underlying applications here, the asset issuance and the payment application.

But then we have the second value proposition, their interoperability that allows us to connect these 2 initial applications into something that is much greater than the part of the 2, right?

And it's this simple principle of instant atomic settlement that drives the entire DeFi economy, right?

Uniswap is really just ERC20 for ERC20 DVPs.

OpenSea, the entire NFT ecosystem, is really just ERC20 versus ERC721 swaps.

And even the trapped-Fi examples that I usually put forward as the simplest ones, T plus 0 settlement, intraday repos, they are at the core, just atomic settlement between 2 asset sort of applications.

And it's this value proposition that really the key to extracting value from blockchain is that composability, that interoperability, which is what most of sort of the section about the blockchain imperatives will be about.

But at this point, I'll hand back over to Ben for a sec.

I think it's a great little just introduction.

I think what'd be really good, Dom, is if you could talk really through how those key value propositions really resonated with you in relation to the process you went through when you were exploring the technology.

And actually, if we take a look at these 2 questions, it was really not necessarily the technology, but the journey that Equilin went through to get to DLT.

And what we started out with was a working group with participants in the SEC financing industry to really ask them, what is your biggest pain point?

Where do you have the most friction in your value chain?

It turned out to be something that Bernard mentioned, which was reconciliation.

Reconciliation in SEC finances is what causes the most manual work.

It causes a lot of knock-on effects later on in the contract.

You have other issues in the downstream once reconciliation breaks.

And then we started to look at why that is.

When a trade is struck on a trading venue such as Equilibrium NGT, it's matched.

Every participant, the bar and the lender agree, but then they end up going into their proprietary systems and that's where the reconciliation problem happens.

We need a single source of truth that is never wrong or does not drift from what the contract values are.

And that is that the non-repudiation and other aspects of DLT were important to keep contracts reconciled.

And it wasn't about building a better reconciliation.

This was about solving a much larger issue.

And the reconciliation problem is really where the largest headache was.

And so when we started looking at some of these key criteria it is, can we use this technology to eliminate that reconciliation?

Does it have some of the other parameters, and we'll speak about these later in this webinar about security and privacy and so forth.

And so we looked at existing technologies such as a relational database, but really that didn't answer any of the questions and it was no guarantee.

So what we really had to do was to make sure that the technology answered that problem, but also was forward-looking.

There are other things that are coming down the pipe, T plus 1, and other regulatory mandates.

And we need to make sure that whatever technology we chose will support those.

It's clear that for Tradfly, not all databases, blockchains, technologies are created equal.

And I think that's already what we're going to cover today is how some of these selection criteria are really critical, I think, specifically in the regulated financial market space.

And you've alluded to a couple of those points already, Dom.

So, Bernard, you've obviously been working with our clients on this a long time.

What are the common things that we've learned and what are these imperatives that we see for traditional financial institutions and FMI's considering the technology?

So this is really now the sort of the heart of the session today.

You know, the question, you know, if if these value propositions are so great, if it's all about that connectivity, why are we not seeing more of that in TradFi already?

What are the sort of, in a way, the imperatives that technologies need to satisfy to truly unlock the value of blockchain for traditional finance?

And there's, I think, really 3 pieces that need to come together in unison to enable that.

And we'll go into each of these in depth here.

But I quickly want to just frame this up as an introduction, right?

We've sort of already talked about sort of the regulatory context, but really traditional finance institutions need their own independent controls, right?

They need to be able to control their governance, permissions and infrastructure, right?

The alternative to that public blockchain, everyone deploys to what is essentially a sort of a decentralized mainframe with very radical transparency, essentially reduces the use cases to crypto only.

So without sovereignty, you're not really suitable for traditional finance.

Big topic in the blockchain space right now.

The whole idea that each application must be able to independently control who gets to read its data.

But in fact, we'll go into that really, even within an application, protect users' data from each other's, right?

Without that, all assets, all settlements get leaked widely.

So again, you really limit to those use cases that are open to radical transparency, which means you're not suitable for most traditional finance.

And the third is, back to that second big value proposition, despite that sovereignty and despite that privacy, you must still be able to connect your applications using atomic smart contract calls, at least to the degree where you can do risk-free settlement.

Without that, you lose a lot of that real-time synchronization, you don't get the connectivity, you reduce the value of the system.

And it's really this combination of factors which led us to launch the Canto Network, a decentralized infrastructure that is a network of networks that really fulfills these 3 core imperatives that make blockchain fit for regulated financial enterprises to really unlock the full value proposition.

And I'll start here with sovereignty, just to sort of really sort of make clear what we mean by sovereignty, right?

It's the opposite of collective governance, which is something that traditional finance is actually very familiar with, right?

In general, in today's market, the financial markets are sort of have a core element of collective governance, which are the financial standards, payment rails like Swift or message standards, like ISOFIX, FPML, but then sort of outside of those very tightly controlled standards, institutions control applications, the infrastructure, the APIs, availability and quality of service, software development life cycles, privacy and access, and so on.

Standards and collective governance are really, I would say, a sort of very narrow sort of slice kept to the bare minimum for business interoperability.

And they're usually given to joint ventures and standard bodies, right?

Another way of looking at sovereignty is The internet is exactly a network of networks that gives these institutions application sovereignty, which is why it works so well.

It's a fairly open infrastructure, anyone can connect to anyone really, but every application on the internet is still very much on independently controlled terms.

And the blockchain space ultimately understands this conundrum, which is why we've seen for half a decade now the emergence of private blockchains.

We are currently seeing a big push towards subnets, be that from Polygon or Avalanche or Cosmos, right?

Everyone is trying to attract enterprises by giving them their own independently controlled corner of blockchain.

But this generally presents financial institutions with a really difficult trade-off between the public and the sort of sovereign, right?

You can either go to a public blockchain network, really the mainnet, deploy on Ethereum or Bitcoin or Polygon, in which case you are, as I said, effectively deploying to a decentralized mainframe.

You don't have any privacy, you give control to foundations and validators of those networks, you have a lot of regulatory scrutiny, but you get that value proposition of interoperability and composability.

Very difficult trade to make because of all the trade-offs.

So instead, we see a lot of financial institutions go the other route towards private islands, private blockchains on centralized deployments or L2s, subnets, which give that sovereignty, give some very limited privacy.

I'll go about that, go into that in the next imperative, but you end up with stranded assets, no real interoperability between these applications, between the assets, and even key use cases like DVP effectively get lost.

So blockchain doesn't end up delivering on its value and we see a lot of failed projects, right?

We see failed projects on public chain because they can't really use that infrastructure for regulatory reasons.

We see a lot of failed projects on the private islands because the full value proposition isn't realized.

Yeah so I mean this idea of control sovereignty it's quite hard to think of in its you know on its own I think it combines with a lot of the other, with the other imperatives you talked about.

But Dom, what does sovereignty really mean for 1 source?

What does it really mean for your application and some of the choices you made?

Were there trade-offs you wanted to avoid?

Were there regulatory obligations that you had to meet, for example, that meant this kind of level of control was critical?

So sovereignty means where we fall in that diagram on the previous slide, was obviously we're on the private side.

And we had to assure all of our clients, which are the major financial institutions involved in SEC financing, that sovereignty was something that we took very seriously.

And we needed to make sure that they would have the ability to apply whatever governance and whatever rules and oversight that they need to over their data.

And I think sovereignty here encompasses other things as well.

So there's the data sovereignty, there's also the data location and where it's domiciled.

And all of those went into our factors of choosing DLT as opposed to an established technology like some type of database.

And we always, Equilina as a regulated entity, are always looking at our regulatory obligations and also what is coming out in the future.

So T plus 1 and SFTR and CSDR and all the others and there's more that will come.

We have to make sure that the data is fully sovereign.

And we have that input from our clients in terms of what control they need.

So all of those went into our feature matrix when we were looking at different technologies that could help us achieve the 1 source DLT success that we were looking for.

We all look at privacy and we'll talk about that later, but I don't think enough is given to sovereignty, especially when we are also talking about push to the cloud and Many of the firms that are moving to the cloud are really talking about sovereignty, but I don't, I'm sorry, privacy, but I don't think they're giving enough into sovereignty.

I think that leads us on to the privacy topic.

And I know we've been, we put it second on purpose is usually the 1 that comes first, but I think let's delve into the privacy angles now, Bernard.

I think, I think Dom actually said it very well that at the moment, privacy and interoperability are the fashionable topics in the blockchain world.

Sovereignty doesn't get the attention it deserves, but it's what, in my opinion, actually drives a lot of the decision-making between certainly the public and private spaces.

Now, sort of starting with privacy, first of all, I just want to acknowledge again, this is not a sort of, not a secret sort of thing that we're presenting here, right?

Privacy is 1 of the 2 big topics in the blockchain space right now, right?

To use Vitalik's words here, it's the big future challenge for this, the Ethereum ecosystem.

And the really interesting thing he says here is, a few things like scaling can be tagged onto such an ecosystem, right?

Can be solved generically with rollups and so on.

It needs to be worked on very intentionally and for each application.

And that is a real challenge for existing blockchain systems that weren't designed with privacy in mind, right?

It's very difficult to add on after the fact.

The guarantee that only approved parties are allowed to view and access data.

In the asymmetric sense, some parties must see the data, others absolutely must not.

In line with the DVP example, let's take the asset side.

If we have a stock there, the issuer, the register, the account holder must have full transparency, right?

They must know the holding at all times, but on the flip side, nobody else in the market should have any information about that.

But it's that second part, which is so difficult to realize in a blockchain context, right?

And sort of the attempts that we're seeing there with anonymity or pseudonymity, they do not work, right?

All the research on blockchain privacy shows you really do need to withhold the data to get real privacy.

And you need that even for the simplest applications like DBP, right?

Sort of the backbone of the capital markets, it needs to respect privacy.

If we go back to the idea of having a bond on 1 side and cash, a banknote or stable coin on the other that we want to swap, we do want that swap to be atomic, to happen at the same time, but the details of the 2 sides must remain private.

The CSD in this case, the register for the stock, shouldn't be able to see the cash balances of the buyer and seller.

You could even argue they shouldn't see even what payment vessel is being used.

Similarly, the bank or stable coin issuer that makes the payment asset available shouldn't see any details about the securities positions being moved.

Arguably, they shouldn't even see that the payment is for a securities movement, right?

All the CSD and the bank should see here is money is being moved on 1 side and an asset is being moved on the other side.

Right, and this is the exact opposite of what drives public chains, right?

Ethereum's sort of reason for existing is radical decentralization and transparency, right?

Which is the exact opposite of the granular privacy and entitlements traditional finance asset needs to go into production.

And that's 1 of the key sort of elements holding things back.

And there's a lot, I think, of obfuscation of that in this space.

Most public chains today, in my opinion, are a bit out over the skis in terms of privacy.

They put forward the idea of L2s and private chains as a privacy mechanism, which they're not in a meaningful way, right?

Yes, they are privacy measures in the sense of a private blockchain that you can restrict the people that can access that blockchain, but in and of themselves, roll ups and side chains are still fully transparent.

If you do a bond issuance on a side chain, anyone that ever handles that bond sees all movements and all positions of that bond.

And to then go further and have that sort of, I would say that composability of sort of 2 privacy enabled applications, you really need a blockchain with privacy baked in to enable heterogeneous applications like that DVP.

And without these privacy properties, real world assets cannot embrace blockchain, which is sort of really the second reason adoption is not yet happening at the speed people predicted.

And at this point, I want to make just a quick note about 0 knowledge proofs, because they are the other big talking points on privacy in the industry.

And I'm a very academically minded person.

I think they're absolutely fascinating, but they are currently a technology of the future.

Right now, there are no scalable implementations of general purpose, 0 knowledge proof privacy, right?

There are a few implementations which are incredibly resource hungry.

There are some numbers flying around of, you know, 64 core machines being able to handle less than a 10th of a transaction a second.

They are only proven right now for very narrow tokenization applications like Zcash without that composability, without general application interoperability.

And there are whole categories of bugs in 0 knowledge proof issued assets, which are just scary, right?

The sort of the research community talks about the possibility of an asset like Zcash having an unbounded number of basically fake coins out there, which nobody will ever be able to detect thanks to the properties of 0 knowledge proofs, which again is a property that for traditional finance is just untenable.

What I'm going to say is probably sound obvious, but paramount in our decision were the privacy capabilities of whatever technology, blockchain, DLT that we were looking at.

As you can imagine, in any kind of securities finance world, SEC lending, where you have lenders and you have multiple borrowers, the borrowers and the lenders, lender, borrower A should only be able to see the transactions they've done with that lender.

Borrower B should not be able to see what borrower A is doing.

And you can imagine this whole network of borrowers and lenders, this landscape, the privacy between all of the individual participants, which is governed by master service agreements is paramount.

That is something that we, when we made our initial investigation into blockchain had to be there from day 1.

It's not something that, oh, we will get to.

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Webinar - TradFis Blockchain Imperatives - Hard Truths for Financial Services