How to make the digital asset markets grow – How can blockchain-based token networks achieve full inter-operability?
- Future of Finance
- Apr 8, 2024
- 10 min read
Updated: Jul 10
A Future of Finance interview with Gilbert Verdian, CEO of Quant
Tokenised assets markets, though rich in the promise of cost savings and higher returns on investment, remain disappointingly small. However, the obstacles to the scaling of the digital asset markets are increasingly well-understood, and gradually being cleared. Legacy laws and regulations are proving more workable than expected, and being adapted where they are not. Experiments by regulators, central banks and private sector firms, sometimes in regulatory sandboxes and sometimes at BIS Innovation Centres, may not have bred a new caste of blockchain giants but they have proved that the technology works and legal and regulatory constraints are not fatal. Established intermediaries are losing their scepticism and fear of disintermediation and exploring the opportunities to profit. Whole new infrastructures, such a unified ledger or single programmable platform, are being conceived. Ways of putting central and commercial bank money on blockchain are being found. So it feels like the time is ripe for a business such as Quant, whose founders recognised at the beginning of the Initial Coin Offering (ICO) bubble in 2015-17 that the digital assets industry was creating potentially existential problems for itself in its lack of alignment with existing regulations, its failure to develop regulated forms of digital money on-chain to complete the cash leg of transactions and the determination of competing blockchain protocols to monopolise activity rather than capitalise on the network effects of making digital assets portable between blockchains. Since its foundation in 2015, Quant has focused on adapting blockchain technology to meet the needs of regulated banks, asset managers and insurers, and reassure the regulators and central banks that supervise them, by developing tools that enable blockchain protocols and traditional systems to interoperate successfully. Dominic Hobson, co-founder of Future of Finance, spoke to Gilbert Verdian, CEO of Quant.
Key Insights
Inter-operability between blockchain networks, and between blockchain networks and traditional financial markets, is essential to overcome the isolation of digital asset and traditional asset markets and so fuel their liquidity and growth, and the digital finance system must be designed and built from the outset with inter-operability at its core.
Proprietary solutions to the inter-operability problem cannot build inter-operability into the new digital finance system from the outset, so institutions in the private and the public sectors must work together to co-design and then co-build standardised infrastructures that enable tokens to be ported seamlessly between networks at the local, regional and global levels.
The financial market infrastructures that serve traditional assets at the pre-trade, trade and post-trade levels cannot be replaced overnight but must be integrated into the new digital financial market infrastructures, where they will persist only until the cost of maintaining them exceeds the costs of investing in the more efficient and service-rich digital alternatives.
A unified ledger, or single programmable platform, of the kind outlined by the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the Regulated Liability Network (RLN), will develop in layers as standardised national and regional platforms are built through private-public collaboration and start to inter-operate on a global scale.
Transcript
33:04 Dominic Hobson: The third area I’d like to discuss with you as an obstacle to rapid progress towards large and liquid digital asset markets is inter-operability. This is the one obstacle to the growth of the digital asset markets that almost everybody seems to be able to agree on. It’s just simply too difficult to port your assets seamlessly between blockchains, let alone between blockchains and traditional finance networks. We are starting to see fixes to that solution. You have one yourself in your own business called Overledger. You’ve got competitors also putting forward solutions of their own. But I know this is your specialist subject. You advertise yourselves as champions of interoperability, and I just wonder what it means to you. Why is interoperability so important, and how do you see the problem being solved over time?
34:08 Gilbert Verdian: So we’ve pioneered inter-operability very early on, and we saw the challenge that everyone will face. 2000 … I think it was around 2010, when things were evolving, and you could see that we were heading in the wrong direction, and we needed to make that right. So, from our perspective, we were quite early to recognise the problem and quite early to start finding the solution. And that’s what we did with our technology and our platform with Overledger, and that was something that we have had since 2017. So it’s been quite early. The need for inter-operability is really business-driven. It’s market access. And what you don’t want to do is … We’re evolving a financial system to a digital finance system. It’s transformational, it occurs every few decades. It is quite foundational. And what you don’t want to do is to get that wrong. And having fragmentation, having assets and jurisdictions only operate in silos, having the lack of interconnectivity and interoperability severely limits the market. And it’s not just a technical solution, it’s a business solution to give access to different types of instruments in different types of jurisdictions, issued by different types of issuers, and allowing those new asset classes to freely transact and trade on global systems. And having that in the right technology, which is where inter-operability comes in, gives you that ability to have that seamless experience and gives you that ability to differentiate to what we’ve already got today. There’s no point creating another financial system that’s a mirror of what we can do today. No one will use it. It’s like, why do we need to change because we’ve already got everything that works? So having inter-operability is an enabler that can allow new instruments, such as tokenised equities, securities, funds, et cetera, to settle with tokenised bank deposits or central bank digital currencies, but work across any jurisdiction, on any system, on any network. And that’s very different today, because there is no way you can do that easily today. And no amount of regulation or investment in technology can solve the existing system, can update the existing system to be able to do that. So it really makes sense for us to build this new financial system with inter-operability at its core, which allows it to differentiate to what we’ve got today. And it makes the whole system grander and larger and more exciting, because all of a sudden, it’s back to market access. You’ve got access to new types of assets, new types of instruments, and new jurisdictions that you can transact globally.
37:22 Dominic Hobson: At the moment, we have competing solutions to the inter-operability question. Is that a good thing? Do we need a sort of TCP/IP solution, something that everybody agrees on to facilitate inter-operability? And if you were looking to drive market participants towards that sort of single answer, would it be helpful if central banks, supranational banks, financial market infrastructures, like central counterparties, payments market infrastructures, central securities depositories, adopted a single standard? I think history shows sort of mixed results from that. If you look at adoption of ISO 20022, for example, you’ve got not everybody’s going down that path, even in the payments industry. So these things are difficult to make it work. But can you get the critical mass of industry to adopt a single solution? And what part can regulators and state institutions play in encouraging that, if that’s what we want, or do we want continuing competition between inter-operability solutions?
38:31 Gilbert Verdian: I think what we need is not a fragmented approach by implementing proprietary solutions, proprietary languages, proprietary protocols that will work in a very small segment of the market and that will serve that market but, at its core, it’s not very easy to then integrate that into anything else. We’re seeing consortiums being stood up, and that’s great. It works only if you’re part of that consortium, but what if you’re not? What about the rest of the market? So the right way to solve this is through mainstream adoption by standards. So having common standards, where it is accepted that it will work for that jurisdiction or for that implementation or for that FMI [Financial Market Infrastructure], for example, it really allows participants to enter and integrate into that FMI (financial market infrastructure), but it also allows that FMI to work with other FMIs in different jurisdictions. So having kind of a global approach, rather than looking at something in silos, in small jurisdictions, we don’t want to create an ocean of islands. We want to be able to all transact globally and have our financial systems inter-operate. The best way we’ve seen is co-designing and co-building as an industry. And it doesn’t make sense for a single bank or a single jurisdiction or a single technology to be adopted in a silo. It makes sense for a uniform approach to this, where groups of consortia or groups of industry participants get together and they help co-design and co-build with a private-public approach on what the infrastructure is going to look like. And that way it’s mainstream from the outset because it’s all done with all the participants in mind, and they all have a seat at the table and they all have a say in terms of how this should work within that jurisdiction, within that FMI, or within a uniform approach to connect to other FMIs or to other infrastructures. We’re seeing a lot of activity in that space. And what we want is that interconnected and interoperable approach from the outset, because then that way we’ll have that connected world, the digital finance system, that will allow multi-jurisdictional transactions across common rails, that can work across different participants. We’re seeing that being implemented as we speak, but it’s very encouraging to see more of that and the industry get that, and they are doing that. They don’t want to make the mistakes of the past and create something that may be good for today, but it won’t last for the next 30 years, and changing something that’s already been implemented in the future is costly and very prohibitive. So they don’t want to do those implementations of what we used to have 20-30 years ago in previous systems.
42:10 Dominic Hobson: You’ve been very clear that there’s no point in reproducing the existing system with all its silos and islands of activity. And this may be a stupid question, but do you ever worry that by providing these interconnectors between the different presently siloed systems, whether they’re blockchain-based or traditional systems, does that inadvertently achieve the opposite of what’s intended, that actually it enables systems which have outlived their usefulness, shall we say, to continue to exist longer than they should? In other words, inter-operability rescues them from their own obsolescence. Is that a stupid question or not?
42:49 Gilbert Verdian: I think with any technology, it evolves based on business need. So, yes, we’ve seen different systems that have been running for 30 years and they’re still running, and they might continue to run for another 30 years, but those systems have been so critical because they’re deemed national infrastructure. They’re so critical to a process, it could be pre-trade, trade, post-trade. It’s very difficult to replace them. So they will have their place and they will be integrated into whatever else we’re building in terms of infrastructure. But eventually what will happen is there will reach a point where it’s too costly to reinvest into that system or to run that system. And then we’ll see examples of co-existence happening where that similar functionality can be done on a new modern system, on a different technology stack, that is more future-proof. And then you’ll see that evolution and a transition of volumes from the legacy to the new. And eventually the legacy can be decommissioned and retired. So we are seeing that evolution. It is quite natural in technology for that sequence to occur. But they have their place. I mean, we cannot turn off all our existing systems because we’re thinking of designing a new one. They have their place and they have their need, and they will continue to operate as they do.
44:24 Dominic Hobson: One final question on interoperability, and it’s this. There’s been a lot of interest recently in solving the interoperability problem by building a new infrastructure, referred to as a unified ledger or a single programmable platform. And it’s been put forward in different ways by the Bank for International Settlements (BIS), by the International Monetary Fund (IMF), and it originated even with a private sector initiative, the Regulated Liability Network (RLN). Do you see that as a good idea, an obvious way forward?
44:59 Gilbert Verdian: I do. And having a lot of experience in banking and payments as well, what we see occurring is there will be a common inter-jurisdictional settlement network, and that needs to happen as an overlay to the different systems that are being developed. So what will happen is each jurisdiction will either create their own or plug into a nearby settlement network that is being developed. And it could be sovereign, it could be regional, it could be by institution – one bank might have their own, for example. So what will happen is you plug into your nearest connection based on your need. You either do it yourself, you work with your peers, and you co-build and co-design what that looks like, or if there’s one that’s existing the way we’ve got it today in payments, you could connect to an agent bank and they onboard you to the network. So we’re going to see that same approach and that same adoption. That’s going to happen bottom-up in terms of domestic jurisdiction connectivity, then up to regional, and then from the regional you’ll have that common layer between the different regions, which is where that settlement network comes in. And yes, there’s opportunities to explore mBridge [Project mBridge is a collaboration between the Bank for International Settlements (BIS) Innovation Hub, four founding central banks and more than 25 observing members to build multiple Central Bank Digital Currency (CBDC) common platform for wholesale cross-border payments], RLN [Regulated Liability Network] and others. And it makes sense for banks to do that because they all have a say, they have the experience and the connectivity of past networks to bring to these new types of networks. And it gives them a common way to inter-operate without forcing something proprietary, and it gives them the ability to do it themselves, work with peers or just connect, or outsource that to a provider that you trust and get them to connect you to your nearest regional connection. So we’re going to see that occur. But what happens in terms of which one will work? It’s to be determined. We don’t know. But the industry will decide eventually because it will be done as a private-public initiative. But it also is driven by all the institutions working as peers in co-designing and co-developing this.