Mar 7, 2016

Numerix Panel Discussion | NRI & Greenwich Associates Weigh in on Global Blockchain Impact

In this panel discussion moderated by Jim Jockle, CMO of Numerix, Kazu Yokokawa, Director of Financial Services Research and Technology Division at Nomura Research Institute, America and Richard Johnson, Vice President, Market Structure and Technology at Greenwich Associates share their perspectives on Bitcoin and Blockchain technology going forward. They expand on some of the fascinating research and innovation they’ve observed around this technology, including several POCs being conducted within the securities industry.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Today we’re going to have a conversation about Blockchain. To start I want to reference a report from Goldman Sachs titled “Emerging Theme Radar” which went to its clients in early December. The report state while the Bitcoin hype cycle has gone quiet, Silicon Valley and Wall Street are betting that the underlying technology behind it, the Blockchain, can change, well, everything.  To discuss that joining me today we have Kazu Yokokawa, Director of Financial Research and Technology Division at Nomura Research Institute America, and Richard Johnson, who focuses on equities and financial technology for Greenwich Associates as part of the market structure and technology practices. Gentlemen, thank you so much for joining me.

Kazu Yokokawa (Guest): Thank you.

Richard Johnson (Guest): Thank you, good to be here.

Jockle: So Richard, let me start with you. So, Goldman says “Blockchain can change, well everything,” so we’ve always thought about Blockchain conventionally as well in the realm of Bitcoin, but where are we today? What are some of the applications that these groups and banks are thinking beyond Bitcoin?

Johnson:  So Blockchain really took off in 2015, it was the year of the Blockchain. Bitcoin has been around for a while and just to give you some background, what Bitcoin does, it allows you to send money from anyone in the world electronically over the internet, essentially. So it’s a peer-to-peer electronic cash system. That got peoples interest because the banks started looking at it and started saying well instead of using Bitcoin, what other kind of digital assets can we put on the Blockchain, can we transfer in the same way and that’s why Goldman said it can change everything because anything you can digitize you can put on the Blockchain and create a trading and settlement system for it. So there’s a lot of use cases that people are looking at right now. We heard about syndicated loans, private shares, things like that, where there’s inefficiencies in terms of the market, in terms of the trading of it, and in terms of the settlement Blockchain can step in and solve those problems. That’s why there’s so much interest there.

Jockle: Now R3, the Blockchain startup is leading a private consortium consisting about 42 of the world’s largest banks. In the near term, thoughts on what they want to try to accomplish to really begin to accelerate this?

Johnson: They’ve got a good approach on getting a lot of the banks together. So R3 CEV is focused on private Blockchains and not the Bitcoin Blockchain. So instead of, again I’m going to be comparing it to Bitcoin, having a public Blockchain distributive ledgered database, theirs is private. That means that the people who access it are going to be by invitation only or parties to the transaction. So that solves a lot of the confidentiality issues around the Bitcoin Blockchain. So you’ve got the banks involved because these are the main players who are going to be doing these types of transactions. Whether it’s for syndicated loans or private shares or whatever, they’re the kind of the banks working with each other. So I think it’s a good step but it’s a lot of banks to work with. I think it’s going to be hard to get everyone to agree with everyone at the same time but I did read recently also that they did a proof of concept with 11 banks in the Ethereum Blockchain product to transfer some assets amongst each other. So they kind of starting off perhaps with some small groups and building up slowly towards a bigger effort.

Jockle: And Kazu, Blockchain is a global phenomenon now. Perhaps you can give us some perspective as a result of what is the state of Blockchain, not just here in the US, from NRI America’s perspective, but what about Japan?

Yokokawa: Well, so Blockchain has got a lot of interest from our audience in Japan too. Last summer, a lot of publications talked about Blockchain and people in the financial institutions in Japan are knowing what’s going on. To be honest, not many people know about what it was. We have some POC that has started in Japan and NRI also participated in the proof of concept project in Japan too. So a lot of interests are happening in Japan too.

Jockle: And now, in terms of what is the role that NRI is playing as it relates to Blockchain?

Yokokawa: Sure. So here in the US, people who develop an ECN, ATS, or dark pools left those ECN, dark pools and started to do the innovative technologies which are Blockchain. So they know about the financial institution, what financial institutions are necessary; so they know about technology. So that the doors start-ups with Blockchain are working with the financial institutions here in the US directly. However, in Japan, we didn’t have a lot of ATS, dark pools yet. We didn’t have such experts who know both about financial institutions and technology, but we have an expert who knows about technology a lot. So, what NRI does is we’re going to be the intermediate between the start-ups, who know about technology, and also financial institutions. So that they know three of us can work together and to build a good proof of concept project. So one of the examples we are going right now is we have studied with the POC with Nomura Securities in October 2015 and that’s for a capital market. It’s a three month project. So the reason why we shorten it as three months is we don’t know what the outcome of Blockchain, so we have to shorten the POC project as much as possible to see the minimum result. It’s in the process and once it’s done, if the output is beneficial to the public we are to happy share that information with the public.  So it’s still in the process but we are happy to share that information with the public.

Jockle: Well you know Richard, a lot of work has been done from Greenwich Associates and a lot of research as it relates to some of those innovations. You know, what are some of the things that you’ve observed in your experience as it aligns with some of the work that NRI is doing?

Johnson: It’s interesting because the space is moving so quickly. We did our first reports back in July of last year, so a full six months ago, which is a significant point of presenting the Blockchain life span if you know what I mean. Some interesting stuff came out of it then, it’s like we know 17% of respondents were doing proof of concept type activities and 46% worth were planning to do it in the future. So that still left at that point, around 40% who said no to that. I would that number’s changed significantly now with R3 and NRI, many different companies are now doing proof of concept. I bet that numbers increased to about 100%. That’s something we’re going to be redoing this type of service very soon. The other things we got out of that is like the questions back then in July about can you separate a Blockchain from Bitcoin and of course that question has been answered now, everyone knows there are these proof of concepts going on. So the markets evolved a long way and we think that the position we’re in now, it’s been changing so quickly, we’re looking forward to finding out and doing some more research on this and seeing what more of our client base are thinking.

Jockle: Kazu, let me turn to you. A lot of private POCs are going on, things that NRI has been working on as well. Perhaps you can give us a little insight as to why institutions are looking at both paths.

Yokokawa: Sure. Given the example such as financial institutions such as Nomura Securities. We do the POC’s with Nomura Securities but also Nomura Security is part of R3 CEV; they joined last December. I think the financial institutions want to get a lot of information from various and they try to create an ecosystem. I think people don’t believe that they can do it by themselves at all and then they will accelerate the result. They want to get the result as quick as possible, so I think that is a trend.

Jockle: Richard, let me ask you in the sense of applied masters, notable former JPM, now in the Bitcoin, Blockchain world, recently has been reporting that regulators are taking a lot more interest in Blockchain. What is their interest at this point in time and is there a regulatory barrier for potential adoption?

Johnson: So that’s one of the very interesting things about Blockchain and distributing ledgers. So, as I described before, there’s a distributing network of participants who are nodes and it could be different banks who are trading securities with them on the network but what you can also do is you can add another node which is a regulator. So you instantly have the regulators have access to a complete record of every transaction and a full audit trail which is something they don’t have in a lot of other asset classes right now. So it works very well with regulators when you apply this type of concept and also I think, you know, regulators have seen what’s been going on and that there’s a lot of hype, a lot of talk about it and they want to feel they’re engaged so you’re having a lot more conversations among regulators whether it’s the CFTC or the SEC and so forth.

Jockle: Well clearly given the budgets there’s definitely funding for both of those institutions coming up via the recent budget. So definitely getting more bodies in seats to investigators technologies.

Johnson: One of the things on the record, just one of the things that was very interesting is that, who, I don’t know if you know this, but has been quite a pioneer in the distributive legislates space. They have become a subsidiary called T0 and registered securities via a S3 filing, so they’re going to issue new securities and they said they’re going to use the Blockchain and this was approved by the SEC in December, the S3 was approved.

Jockle: Interesting change in the landscape.

Yokokawa: Yeah that’s very interesting because in Japanese FSA is also interested about Blockchain and they issued a public announcement last December that they’re going to study what Blockchain is going to impact on the securities market in the banking market. So SEC and the US should work with the Japanese FSA more to share the information and see where it goes.

Jockle: Well, we can definitely argue that the world is getting smaller and much more collaborative especially as technology is removing a lot of barriers.

Yokokawa: Exactly. So one of the examples is in the US, eight years and ECN became a boom I would say in 2002, is that correct? 

Johnson: Yes, I’d say it’s certainly taken off then.

Yokokawa: But now, the Blockchain, Richard, Me, and Jim, we are talking about Blockchain simultaneously in terms of the global landscape. So I think the information is moving from US, Europe, to Asia, APAC market, simultaneously.

Jockle:  You know, a lot of banks now have a lot of incubation centers, things of that nature. Looking at a lot of start-ups, do you see a lot of money flowing into those start-ups, trying to investigate some of these new technologies? And was it specifically around Blockchain?

Johnson: Well, there’s over a billion dollars going into the space so far and counting. Digital asset holdings have got 55 million, I mean there’s been another 100 million in the last couple weeks that I could think of, so yeah, definitely a lot of money going towards it for sure. Obviously it’s going to be a big payoff. One of these large banks looking into it, I can’t remember if it was Santander or BBVA, said that the estimated savings are twenty billion dollars per year from Blockchain technologies. So that’s significant.

Jockle: Yeah, give or take a dollar or two. So Kazu, you also just recently completed a proof of concept around this as well, in addition to the work that you’ve been doing at Nomura. Is that correct?

Yokokawa: Yes, that’s right. So SBI Sumishin we started to do the proof of concept project with SBI Sumishin which is more for our banking side. So, you know, we tried to work with actually a start-up company called Dragonfly of FinTech, which is headquartered in Singapore and that has produced the first private Blockchain in Japan. So, we’ve been working together to come up with a good result from that POC as well. In addition to that, we did as research from Nomura Research Institute, we do the research, and we do the surveys with the financial institutions in Japan. So we did it with about 50 financial institutions last year, and then 30% of them have already taken dedicated teams for the Fintech Innovation, and the other 30%, 4-5 financial institutions, are working with external partners. So, as probably from the start of this video blog, we said that a lot of transactions are happening in the US market and Japanese market. So people here in Japan and Asia are also interested to know about what’s going on.

Jockle: So, let’s talk about what’s next, specifically for Greenwich on this topic, as well as NRI. So Richard, I’ll start with you. What’s on deck?

Johnson: Everyone’s looking at this as we just talked about, everyone’s looking into it. I think what Greenwich is very good at, is about getting the pulse of the market, talking to the hundreds of Buy-Side contacts that we have, the hundreds of Sell-Side contacts that we have, and figuring out what people are thinking, what direction the market is going to go, what’s going to take off next. So, what we want to do and we want to kick off another study soon, is focus on a few specific use cases and really dig down into details. I think a lot of the conversations have been very high level. Blockchain, Blockchain, Blockchain. But let’s think about it. Let’s address the syndicated loans market. How exactly would that work? What do the people in that space think about it? What would the savings be?  Collateral management is another area we’re looking into. What are the areas that take off initially? Essentially using the Blockchain as a record, as a distributed record of the collateral applied to different trades and so forth. So that’s another area we’re going to be looking at.

Jockle: One other question before I get to you Kazu. You know we’re talking mainly about the banks. Where do we see the role of the buy-side in this innovation? Are they just going to be ultimate consumers or do they have a seat at this discussion table right now?

Johnson: I think, we’re beginning to hear more about that now. For the most part, understanding this started at the banks, we’re talking about the trading of these types of products. When it comes to custody, I mean that’s another area where the custodian banks, which are often more buy-side type of institutions are looking at Blockchain.

Jockle: the Northern Trust's, the State Street's, very good.

Johnson:  Yes.

Jockle: And for you, Kazu, what can we expect in the near term from NRI America’s end and NRI back in Japan.

Yokokawa: Sure. So, as we mentioned, if there’s any innovations that are beneficial to the public, we are happy to share it with the public. So one of the examples that we are doing currently is we issue a regulatory report, monthly report, and we distribute to more than a thousand senior managers in the Japanese market and then we talk about what Blockchain is, we try to educate the market, because this is not just one financial institution is doing, this is what markets should do. Also, we are happy to do more POC’s if the clients want to work with us and then also want to work with Greenwich Associates more because we think that this is very innovative and we have to share the information and as I said, we have to create an ecosystem, so that’s a benefit to all of us.

Jockle: Well gentlemen, I want to thank you so much for coming and most importantly, where can we see that I know I saw the announcements on your website, what is the website address, just so everybody knows, we’ll make sure it’s on the bottom of the screen too.

Yokokawa: So,

Jockle: Ok, thank you. And Greenwich Associates is …?


Jockle: And the city of Greenwich hates you for that. Well gentlemen, I want to thank you so much and of course as always on Numerix Video Blog we want to talk about the topics that you always want to talk about; please be sure to follow us on LinkedIn to stay up to date and please be sure to look up our grateful guests, NRI Americas as well as Greenwich Associates. For more information about the information that they’re bringing to the market place as well. Thank you so much.    

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