Tim Swanson discusses the challenges of building modern financial market infrastructure (FMI) using distributed ledger technology (DLT). FMI requires international collaboration between regulated participants, unlike individual entrepreneurs building social media platforms. Regulations govern areas like capital requirements, data privacy, and smart contract legal issues across jurisdictions. Central bank-issued digital currencies (CBDCs) could allow direct peer-to-peer transactions without intermediaries, but differ from cryptocurrencies by being tied to a central bank and monetary policy. Key challenges for DLT in financial services include governance, scalability, security, integration with existing systems, identity, and legal recognition of smart contracts.

1. Tim Swanson, R3
DLT as FMI
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Cannot fly an airplane without having airports to land at
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• Designing, building, and deploying modern financial market
infrastructure (FMI) requires a different model than the typical
fractured approach seen with entrepreneurs involved in creating
social media platforms.
FMI
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• Some of the difficulties and challenges include not only
technological capabilities but due to the interconnectedness of
global finance, and the breadth of regulatory requirements.
• You need a diverse set of international participants otherwise
you can become silo’ed once again.
Not a social media app
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• In South Korea, just as in the United States and other
industrialized countries, FMI takes years to design and deploy,
and teams of IT teams to maintain and operate the production
version.
• Examples:
• South Korea: KFTC, KRX, KSD
• United States: Fedwire, DTCC, ACH, CHIPS, CLS, CME, ICE
• International: SWIFT, Euroclear, Clearstream, TARGET2
Duct Tape
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Many of these systems were built prior to
IP-based networks existing
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• Part of the motivation towards international
collaboration:
• mutualize and harmonize the post-trade processes among
cross-border trading partners
• stems from regulators in each jurisdiction wanting to reduce
risks in the settlement process (e.g., reg reporting)
• providing more transparency into the life-cycle of assets and
agreements
• reduce the duplication and redundancies of FMI which
provides similar services
• tap into emerging capital pools that have otherwise been
silo’ed
Trend Towards Mutualization
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The Shared Operating Model
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• Shared smart contracts solve for agreed standards for
accurate, complete data. Receipt of digital signatures and
consensus signals on a shared ledger solve for timeliness.
The root causes of most data reconciliation errors between
counterparties are eliminated
• Operational costs are collectively >$100 billion USD for major
financial firms.
• Adding finance and risk related data reconciliation creates an
even greater savings opportunity
• Business processes across entities are the promise –
automating those processes across trust boundaries.
• Do it once, do it for all. No need to replicate then reconcile.
Digital Signatures / Contracts
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Clearing &
Settlement
Enter Market Order Management Trade Execution
Research / Modelling
/ Strategy
Trade Management
Collateral
Management
Single Shared Ledger
What does this joint-back office look like?
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What does this have to do with DLT?
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• As Metcalfe's Law articulates, a network becomes more useful
and valuable the more participants are connected to the
network.
• Consequently next-generation FMI needs to be inclusive from
the onset, otherwise will become siloed off and become
uncompetitive.
• And DLTs in turn trend towards shared provisioning's
The Core of DLT is a Network
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World Economic Forum Report on DLT

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The Significant Evolutionary Step of DLT

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Introduction to Distributed / Shared Ledgers &
Illustrative Use Cases

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Distributed Ledgers at a Glance
Distributed ledgers are records of agreement consensus with a
secure (cryptographic audit trail maintained and validated by
several separate computers nodes
Agreement mechanisms evaluate information provided by
participants to ensure consent among all relevant parties in
an entry
When a transaction is added to the ledger, the network is almost-instantly privy to this
new version
• Distributed ledgers leave behind a cryptographically assured audit trail and timestamp
• All parties in the network keep a copy of their view of the ledger
(consensus)
(cryptographic)
(nodes)

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Regulators
• FX Settlement
• Trade Reconciliations
• Transparent Valuations
• Cross Border Payments
• Credit Efficiency
• Loan Settlement
• Derivatives Clearing
• Collateral Management
• Client Onboarding
• Intracompany Settlement
• Normalize Reference Data
• Timestamping
• Account Portability
• Broker Fraud Identification
• Securities Agreements as
Smart Contracts
• Crowdfunding
• Virtual Identity
• Credit Scoring
• Cross Border Remittance
• Vault/Escrow Services
• Customer Deposit Cost
• Peer-to-Peer Lending
• Anti-Money Laundering /
Know Your Client
• Compliance Reporting
• Risk Visualization
• Basel III Compliance
• Client Fund Transparency
• Trade Reporting
Distributed ledger technology has a myriad of potential use cases for financial institutions, regulators,
operations & individuals
Financial Institutions IndividualsOperations
Illustrative Use Cases Leveraging DL Technology

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• “Blockchain technologies could reduce banks' infrastructural costs by $15-20 billion a
year by 2022”
• Santander / Oliver Wyman
• “In the personal motor insurance industry alone, smart contracts are estimated to have
the potential to result in approximately $21 billion in annual cost savings globally for
insurers through reduced processing costs”
• Capgemini
• “Blockchain technology could streamline the clearing and settlement of cash securities,
saving capital markets $2 billion in the US and $6 billion globally on an annual basis”
• Goldman Sachs
• What is the current size of the business opportunity globally? And future expectations?
Savings is One of the Main Reasons for Current
Interest

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Regulatory drivers

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Over the past two years a multitude of governmental
bodies globally have held public and private meetings to
gather information regarding the role, if any, that DLT and
orthogonally related technology such as multisig could play
in the formal financial system
Regulatory Drivers

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A number of topics around the regulatory challenges and opportunities surrounding it.
This includes:
• Definitive settlement finality and legal status of ‘smart contracts’; in
some jurisdictions, regulators have the authority to mandate reversals
in markets such as equities, how does this impact DLT design?
• In the event of a bankruptcy or default of a trader or operator on a
DLT, how does this impact trades conducted by the entity in a
network that spans multiple jurisdictions?
Regulatory Drivers

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• Transparency, privacy and risk modeling that regulations currently
require and how those would be carried over onto a DLT platform --
this could include data privacy and jurisdiction laws as well
• How to handle regulated data?
• What are the legal implication/requirements around executing
‘arbitrary’ code on different machines across different jurisdictions?
• Can ‘smart contracts’ take custody over assets on a DLT platform? Are
the machines that execute the code of these contracts seen, in the
eyes of each jurisdiction, as custodians?
Cont’d

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Who can run validators / processors?
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• In terms of capital markets: how are the following functions currently
handled by the jurisdictions our members operate in and how could
that change with DLT? (valuation, margining, custody, netting,
defaults)
• Can a ‘unified data standard’ arise through the use of DLT and provide
a “golden copy” record that meets current reporting requirements?
Cont’d

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How to tie legal prose together with contract code?
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Central Bank-issued Digital Currency

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Why Are CBDCs Interesting?
• Today, no central bank issues a digitized version of their currency
o Since central banks are the arbiters for what is and is not a currency
(Dollar, Pound, Euro), no digital currency exists today as legal tender
• Today, intermediaries, such as commercial banks, act as critical on- and off-
ramps for retail purposes and play an integral role in how people store and
exchange money.
• If a central bank were to issue a digitized currency, we could have
• Peer-to-peer clearing and settlement free of certain intermediaries (commercial banks).
• A digital record of all transactions.
• “Programmable money” which could expedite payments.
• Address Rogoff’s “Curse of Cash”.
• New monetary policy abilities: Zero-lower bound.
o In theory, this could enhance the existing financial system.

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CBDCs Are Not Cryptocurrencies
CBDCs Bitcoin
• Money is a central bank liability.
• The tie to the government
anchors value.
• Monetary policy controlled by
central bank.
• Money is an asset.
• There is no anchor for value.
• Monetary policy controlled by
pre-set terms of currency
creator.

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Bank of England (BoE)
• Recent activity suggests greater interest in CBDCs
o Feb 2016- “Centrally banked Cryptocurrencies” (RSCoin) by UCL George Danezis, Sarah
Meiklejohn
o March 2016- Deputy Governor Ben Broadbent Speech
o July 2016- “The macroeconomics of central bank digital currency,” John Barrdear and
Michael Kumhof
o July 2016- “Digital Currencies research questions”
o Sep 2016- P2P Financial Systems 2016 @ UCL, Victoria Cleland Speech
o Sep 2016- “A new RTGS service for the United Kingdom: safeguarding stability, enabling
innovation”
• The Paper’s CBDC model
o The paper is 92 pages long, and half involves a DSGE model.
o The paper focuses on CBDCs interaction with bank deposits, and the model abstracts out
government-supplied money given its small percentage.
o Assumes “normal” economics times (1990-2006) in the U.S economy.
o 5 participants: Banks, Households, Financial Investors, Unions, Government.

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Why are CBDCs desirable for DLT?
• Bottom line: in order to have on-chain settlement finality (DVP),
need to have cash-on-ledger.
• Otherwise financial institutions would still need to settle “off-
chain” via external reconciliation processes and mechanisms
which according to an estimate from Autonomous research,
collectively costs the industry $54 billion a year.
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DLT Hard Topics
Governance Scalability Security Integration
Identity
Economic Impact
Trusted Oracles/Services
Dispute Resolution
Performance Comparisons
/ Benchmarking
Standard Evaluation
Criteria
Network Topology
Smart Contract
Representation
Threat Zone Analysis “Permission” to Advance
Interim StatesSTRIPE Threats
Sharding & Lite Nodes
Necessary Controls
Privacy / Private Fields
Interoperability with other
DLTs
Upgradeability
KYC / AML

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• Definitive legal settlement finality / legal recognition and
standing of smart contracts
• Regulate data / data custody / data sovereignty
• Governance and dispute resolution
• Fit-for-purpose: not a fork of a cryptocurrency
Four in Particular
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tim@r3.com
Contact
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