State Street Custody Bank Looks to Blockchain For Automating Securities Lending
State Street Provides A Complete Look at Blockchain Uses, From Positives to Negatives
In a recent interview, financial services provider, State Street Corporation revealed its ongoing research and testing of real-life use of blockchain technology. The interview peeled several layers of the technology at hand and went as far as getting opinions from several representatives from the firm. Interestingly, both the positives and possible hindrances were shared, which is surely to enlighten many following the blockchain industry.
Distributed Ledger Technology (DLT) has been praised by many industry leaders, as it rids a business-consumer relationship of middlemen. While State Street does see promise in the technology, the firm believes that transitioning from a centralized to decentralized system will not be an easy task.
In particular, Nick Delikaris, who serves in State Street’s Product Development department told CoinDesk that interest for a peer-to-peer securities lending service has grown among industries. However, he shared that transitioning might be a problem, solely because “it’s not an on-off button, like you can wake tomorrow and be doing everything peer-to-peer.”
Another perspective was also shared by Doug Brown, who is the lead at State Street’s Alternative Financial Solutions’ department. Brown explicitly said that the current stance of the crypto market is simply not enough.
Brown was quoted saying that:
“If you look at that marketplace and the people who borrow securities, there are very few institutions that have the technology or the operational infrastructure in place to do that themselves today.”
He also addressed the different facets that must be considered in implementing a decentralized system, such as its associated cost, whether there’s value in spending such time to create a blockchain-based infrastructure and “the staffing to do it”, to name the least.
Possible Advantages and Disadvantages of Going the Decentralized Route
The advantages of a decentralized, peer-to-peer system, according to representatives of State Street, include the elimination of middlemen and cost efficiency. However, it seems that there might be more hindrances that need more attention, which include the lack of security from loss, putting all trust among players involved in a transaction and inadequate liquidity.
Delikaris shared two facets that State Street has in order to help during transactions. They were shared to show the problems that might arise given that middlemen do not exist. In particular, he said “we have an arm called enhanced custody, which is basically akin to a prime broker,” adding that State Street “also [has] the biggest agent lender in the world.”
After having assessed the potential of blockchain since 2016, State Street was able to have a well-rounded position when it comes to both supporting and standing against blockchain.
Brown sees P2P models as cost efficient when it comes to borrowing securities, but at the same time says that the parties involved must be careful when it comes to relying and giving credit to each other.
As per his words,
“a P2P model, where everybody faces each other and negotiates contracts, where the protection is gone and both parties now need credit teams, would likely not be a broad industry solution,” adding that “if you only had a small number of institutions participating I think it might be challenging to convince people there was enough liquidity to really move that market.”
Delikaris seems to side with Brown in this respective view, as it involves more than just assessing blockchain usefulness, but also understanding “what keeps [clients] up at night.”
He further shared that:
“if some things get transformed because of this technology, what you’ll see are other products and services that will come and piggyback off that to help where those issues arise.”
Another problem is that of lost holdings, which middlemen like State Street normally will insure, that way a transaction gone wrong, will not negatively influence a specific party.
Blockchain Technology from Banks’ Point of View
CoinDesk also pointed out some of the perspectives shared by other banks that have tested the blockchain technology. As per the report, Herve Francois from ING, shared that the bank is “leveraging the existing infrastructure of tri-party agents and custodians in order to go to production faster.”
Francois also added that a P2P model might eliminate certain services, adding that it “could be a way for those actors to still play a role in the short-to-medium term […] It’s a step in the blockchain evolution which in the long run should be able to disintermediate them.”
CEO of HQLAx, Guido Stoemer believes that the DLT might play significant role in a wide range of assets, starting with “securities, then cash and maybe gold.” Ultimately, he stated that projects with “low barriers to entry” will be the ones to succeed.
After reading this piece, are you leaning towards the pros or the cons of blockchain technology?