I recently returned from SIBOS in Singapore. Two of the most frequently used terms there were ‘mobile’ and ‘blockchain’. Unsurprising really, as this SIBOS, more than any other I’ve been to, seemed to focus on the payments industry almost to exclusion of the securities industry. Indeed, the closing plenary speaker, spoke of nothing else while appearing at the same time to be trying to teach the assembled delegates the fundamental basics of their own industry.

But ‘blockchain’ is my topic of interest today. I ‘get’ that it’s potentially a disruptive technology for financial services, amongst others. I even get the technicalities (well most of them) and that blockchain is the underlying distributed ledger technology that underpins such things as cryptocurrencies like Bitcoin.

To be a bit more specific, a blockchain is essentially just a record, or ledger, of digital events — one that’s “distributed,” or shared between many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The bitcoin blockchain is just one realisation of the concept and contains a certain and verifiable record of every single bitcoin transaction ever made. For a great and easily readable explanation try the article: ‘Forget Bitcoin, What Is the Blockchain and Why Should You Care?’

It’s the distributed ledger technology that makes blockchain potentially disruptive, because our world to date has not evolved on such principles. Today we work on centralised databases in a highly intermediated financial services business model. Each of the levels or stages of intermediation between an Issuer and an Investor has grown up because each serves a specialised purpose and adds value within a regulatory and operational framework. That might be trading, clearing, settlement, transfer agency, proxy voting or corporate actions.

Intermediation lies at the heart of financial services and therein lies the existential threat to financial services. So, my issue here is that, at SIBOS, it was clear that most financial services firms have recognised that existential threat and are openly investing in blockchain technology. My point is simple. It would seem that those who stand to be dis-intermediated by blockchain are investing in blockchain, presumably on the basis that by being involved they somehow remove or mitigate the threat of disintermediation (if you can’t beat them, join them). But if firms at every level or stage in the current intermediation model do the same thing, you actually haven’t disrupted the model at all, you have just replaced SWIFT.

It’s also problematic at the macro economic level because the financial services industry is universally distrusted right now. So a model in which the disruptive technology does not require trust would seem to be a difficult one to swallow.

The industry is actually very good at recognising and defusing threats to the status quo, even when the threat would result in a better system. Consider XBRL. I remember sitting in a conference in Washington DC listening to Mark Bolgiano, then head of XBRL, urging Issuers to adopt XBRL and create the long sought after ‘golden corporate actions record’. His case was based on proxy voting in which data is embedded in very long, complex text-based documents. The Issuer tagging these documents in XBRL would make a substantial difference to downstream processing efficiencies. It would also of course, destroy an entire industry – market reference data. Who would need to buy two or three separate market reference sources, if you have access to the golden source, the Issuer themselves. The problem Mark faced then, and XBRL still faces today, is that the people who would need to do the work aren’t the ones who would benefit from it.

Back to the subject matter. In the tax world it’s difficult to see how blockchain would work. The Issuer could certainly create a dividend event and you could certainly see a world in which investors could use mobile technology to purchase shares, these being another blockchain ledger event. This would essentially mean the disintermediation of the entire investment management, custody, clearing and settlement industry. My question is simple: who is going to pay the tax on a cross border dividend distribution? Make no mistake, blockchain or not, tax authorities will want their money. Today, that task is a part of a complex network of intermediation. Only in a small portion of the market are direct shareholdings possible, and only a small portion of countries have a model in which the Issuer is responsible for withholding the tax. Using the XBRL analogy, while blockchain might dis-intermediate the banks, custodians and others, that leaves just the Issuer and the Investor. The Investor isn’t going to have the resources to handle the many tasks required by regulators, even at the institutional level. The Issuers would essentially become global withholding agents on their own issues, which, if XBRL’s experience is anything to go by, would be highly unlikely as there would be no benefit to them, but an enormous cost.

One of the key aspects of disruptive technologies is that, while they can be disruptive, they also have to get over the bar of implementation costs. In other words, the long term benefit of transforming the entire business model has to be lower than the cost of maintaining the status quo AND it has to get past the many interested parties whose every effort will be to make it fail. As I’ve observed in the market reference data world, the golden record is eminently possible and everyone says that they want it – except those who would be out of business as a result and those whose firms are inextricably connected to the intermediated model.

Don’t get me wrong, I’m a great fan of new technologies and new ways to approach things. I guess I’m struggling, given my knowledge of the industry, to see how the immovable object of today’s industry dynamics is going to be changed by the irresistible force of something like blockchain.

Image Credit: Antana