Future of Finance


How a financial contract standard could help Blockchain achieve institutional scale

How a financial contract standard could help Blockchain achieve institutional scale

Blockchain has so far failed to overcome its notorious trilemma: the need for trade-offs between speed, scalability and decentralisation. Until it does, blockchain technology will struggle to fulfil its potential by penetrating the traditional securities and derivatives markets and remain trapped in the mere transmission of value in crypto-currency markets rather than displacing the entire structure of the global financial markets. Enterprise blockchains, the long awaited Ethereum 2.0 and variations on Proof of Work offer a variety of ways around the trilemma. The Casper Association, with its own variation on Proof of Stake, is not dismissive of these technical fixes, but two of its members think a financial contract standard could also help. Dominic Hobson, co-founder of Future of Finance, spoke to Ralf Kubli, an investor and independent director, and Willi Brammertz, managing director at Ariadne Business Analytics, about the Actus FRF data standard, which distils the essence of any financial instrument into its cash flows.

Questions being asked

1. Actus FRF aims to create a global data standard for financial instruments by distilling them into cash flows – in effect, a financial contract standard. Where has the project got to?

2.  If you reduce financial instruments to a set of standard components, how many attributes do you end up with?

3.  Contractual terms are one thing, but financial instruments are also linked to what is going on in financial markets (e. g. margin calls if collateral value falls, default if an issuer fails, flight of deposits if a bank credit rating deteriorates etc.). How can a standard account for those links?

4.  Actus FRF is addressing a problem that the re-regulation of the industry after 2008 was meant to fix: lack of data to tell firms and regulators what is going on in a financial market, The amount of data reported by all types of financial institution has increased massively from Form PF through OTC derivative data warehouses to LEIs– why can’t all that data be processed and analysed instead – why do we now need a data standard?

5.  What are the benefits of the Actus data standard for traders and investors in (and servicers of, such as CSDs and custodian banks) financial instruments?

6.  Do legal terms have to be standardised too?

7.  If legal terms do have to be standardised, can the Actus Data Standard work with the (open source) General Legal Mark-up Language (GLML)?

8.  Actus is creating algorithmic standards. How much data can the standards carry about an instrument?

9.  Are there potential conflicts with existing standards (e. g. FIX, SWIFT, FpML)?

10.  Is there any chance of a regulatory direction (by a central bank or securities market regulator) in any jurisdiction (notably the US) to adopt the standard?

11.  Could international financial regulators (e. g. FSB, IMF, FATF, OECD) help?

12.  Do you envisage a time when standards are irrelevant because AI has progressed to reading unstructured data?

13.  Data flows through APIs, which are becoming increasingly important. Do APIs need to be standardised?

14.  How might an Actus algorithmic standard for financial instrument cash flows be relevant to self-executing smart contracts on a blockchain network?

15. The Casper Association is promising to overcome “the traditional trade-offs for Proof-of-Stake.” Did you mean the trade-offs between speed, security and decentralisation?

16.     What are the benefits of the Casper Association new Proof of Stake protocol?

17.     How can you ensure the new protocol is adopted?

18.     What exactly is the Casper Association?

19.  And what is the relationship between the Casper Association and Casper Labs?

20. What are the obstacles to blockchain fulfilling its potential – and are the obstacles the same now as they were in 2015 or have some been cleared and new ones emerged?

21.       Is blockchain the answer to everything or just some things?

22.       Is it clear to you when blockchain is the right answer and when is not, i. e. are there universally applicable criteria for deciding when to use blockchain and when not to?

23.     Irrespective of whether blockchain is the answer to everything, there must be a period of coexistence between blockchain and legacy technologies even in those areas where blockchain is a sensible answer. How can blockchain and legacy systems work together successfully?   

24.  What will the financial marketplace of the future, based on standardised data flows and integrated technologies, actually be like?