Tuesday, October 11, 2016

Blockchain Fintech: Programmable Risk and Securities as a Service

Access instead of Ownership
One of the most radical and potentially disruptive ideas for the near-term blockchain financial services market is Securities as a Service. Consider the music industry, where in the past, it was quite normal to purchase and own records and CDs, but now music is often accessed through digital media services like Spotify. There is access to music, but not much thought of ownership. “Listening to music” is the consumable asset, which is priced per network models for its access and consumption. Autos are in the middle of a similar transition now, where the asset “transportation” may be more readily fulfilled by services such as Uber, including by autonomously-driven vehicles. In the future, securities and other hard assets could be similarly presented to the market as a service. Securities could be the kind of asset where the “access to the benefit provide by the asset” is the consumable good, not the ownership of the asset. Financial services could thus have a shift from transaction-based pricing to services, as has been the case in other industries. The key point is focusing on the economic conditions under which securities as a service would start to make sense. The only reason securities ownership is required now is because the future value of assets is highly uncertain. The only way to feel comfortable about the future value of assets is by owning them. However, if the future value of assets were more assured, or really the access to the benefits conferred by assets were assured, then ownership might be obviated, and the benefits of securities ownership could be delivered as a service.

Future of Finance: Decentralized Blockchain Smartnetworks
One of the deeper philosophical implications behind the fintech innovation of blockchain is that all economic and financial concepts might be questioned and rethought. This includes risk, value, uncertainty, probability, resources, assets, liabilities, interest, time, transaction, and exchange. The current economic and financial systems are just one way that we have thought about organizing access to resources, and responding to the assumed problem of the protection of the future value of assets, but there could be others, including those that are non-hierarchical and decentralized. One salient question is what risk might mean in decentralized financial networks. The idea that risk would somehow become decentralized too (i.e.; more manageable and predictable, and possibly even decreased or evaporated) since assets can be settled instantaneously via blockchain, is perhaps facile. It is more likely that risk is shifted to other dimensions that need to be articulated. The notion of risk needs to be rethought in a different conceptualization that involves network ecologies. Risk is just one effect of decentralized networks. Other parts of the overall financial services structure are changing too, and also mindset paradigms. There are already some key mindset shifts starting to occur at the systemic level to support a transition to decentralized networks. In economics, these include shifting from labor to fulfillment as the object of productive activity in the economy, scarcity to abundance, and centralization to decentralized network models. In finance, these include moving from ownership to access, point values to topological ranges, and insufficiency to assurity.

Rethinking Risk: Greater Correlation in Blockchain Financial Markets?
One of the key risks of blockchain technology that is not yet being discussed is the implications for systemic risk. With blockchain making the financial sector more tightly integrated, markets and trading instruments might be even more correlated than they already are. The fear is that at worst, it could be that distributed ledgers operated by algorithmic smart contracts could essentially turn the market into one giant HFT (high-frequency trading) vehicle. Already, without current fintech advances, black swan events in markets indicate that what might seem to be diversified portfolios are not, and that regional markets, asset classes, and time frames are much more correlated than imagined. Systems-level complexity simulations of market behavior would be useful. One perspective is that more tightly-correlated financial markets could be seen as progress. As finance moves into the automation economy as itself an automated operation of efficiency, it could behave more like a utility than a margin-rich business. This could trigger significant disruption in the structure of financial and investment services industries. This would be fine if overall risk were also declining, but corresponding steps to reduce global risk such as orchestrating an orderly transition to the automation economy do not seem to be contemplated.

Very-large Potential Impact of Blockchain Fintech
Decentralized networks like the Internet have been one of the most powerful technological arrivals in the contemporary era. Whereas the first phase of the Internet allowed the transfer of information, the next phase focuses on the secure transfer of value such as money, property, securities, and hard assets, particularly via blockchain technology. Blockchain’s secure value transfer functionality provides a significant opportunity to transform some of the last remaining sectors not yet re-engineered for the Internet era such as economics and finance. The status of blockchain fintech adoption is companies re-inventing the financial services value chain around money and data transaction touchpoints. Any organization conducts operations in a network of money, information, and data coupling points, mostly in repetitive processes. There are two levels to business processes: 1) decision-making and 2) execution and administration, the latter of which might be securely automated with blockchain-based smart contracts. Currently, the most successful financial industry implementations of blockchain fintech are those companies who are already addressing how to fundamentally re-engineer their business models for new opportunity, not merely update their operations for efficiency. In a blockchain economy, financial asset-related (and indeed all) value chains could become increasingly streamlined and automated, obsoleting many current intermediary functions such as custody, titling, and insurance. These functions could be replaced by algorithms and smart contracts. Companies across the financial landscape are realizing that blockchain is not a separate industry as much as a new underlying technology with applications in every sector. Internally, this can mean applications for cost-savings, for example in quality assurance, test, audit, compliance, sales quoting, finance, treasury, accounting, and expense management. Externally, developing a leadership edge can include offering blockchain-based services to clients, and leading industry-wide blockchain initiatives for digital value transfer across the network value chain.

Singularity Global Summit Slides: Blockchain Smartnetworks: The Future of Finance and the Automation Economy

Melanie Swan is speaking at the Economist’s Disrupt Finance conference in New York on October 13, 2016. She is a philosopher and economic theorist at the New School for Social Research in New York, and committed to the beneficial use of technology for global impact. She has an MBA in Finance from the Wharton School of the University of Pennsylvania, and is the author of the best-selling book: Blockchain: Blueprint for a New Economy.

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