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The Speed Dreams of Security Tokens

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Noelle Acheson is a veteran of company analysis and a member of CoinDesk’s product team. The opinions expressed in this article are the author’s own.

The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for institutional investors interested in cryptoassets, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.


In nature, fast is better than slow. Being able to outrun your predator increases your chances of survival, as does being able to outrun your prey. So, evolution does its thing and we emerge hardwired into believing that speed is a prerequisite to success.

This sentiment has spilled over into financial markets. Speed is associated with competitive advantage and additional profits. Just ask any high-frequency trader.

It also reared its head at a recent security token event in London, a small but compelling gathering with entrepreneurs, investors and traditional finance representatives debating what form this new type of asset will take.

One of the exercises was to split participants up into groups and rank the supposed benefits of security tokens. We were given a list of outcomes to choose from, which included liquidity, operational efficiency, transparency, innovation and many others. The lack of a clear consensus was unsurprising, given the diversity of the participants (much like the sector itself). What was surprising, however, was the number that insisted the main benefit was “speed.”

This was surprising, as it is based on three assumptions:

1)     That speed is desirable

2)     That blockchains confer speed

3)     That it is a technology issue.

All of these assumptions, however, are mistaken.

Speed is not a priority

First, let’s look at why we think faster transactions would be desirable.

The main reason is risk reduction. The longer a trade takes to settle, the greater the risk that the buyer will default on its payment commitment. In capital markets, things can happen fast, and an investor who wanted to purchase an asset on Tuesday could be out of funds (or hacked, or have its accounts frozen) by Wednesday.

Traditional markets usually get around this problem with a Central Clearing Party (CCP), which steps in to buy and sell from each participant in the trade in its own name and with its own funds. Yet this adds costs and middlemen to the system, and there is still the (remote) risk that the CCP will disappear, leaving trades half complete.

Security token markets do not yet have a CCP figure. Maybe one will emerge as the market matures, adding further liquidity and reliability. Meanwhile, in crypto assets, lack of a fast trade cycle adds risk.

Faster transactions would also be desirable, in theory, because cash could be used more efficiently — but this is only partially true. If I am the seller and you are the buyer, I would like the cash sooner rather than later, thank you. The sooner I can invest it for a return or use it to meet payments, the better. You, on the other hand, would rather give it to me later, since you probably have it parked somewhere earning interest. Or, maybe you need to sell an asset to raise the cash that you need to give to me.

For the instant settlement that blockchain tech promises, you would need to have funds deposited at the relevant exchange or broker. Even if you do get a return on that (a big “if”), it will be much lower than you could get elsewhere. And if you’re managing money on behalf of others, that’s unlikely to be acceptable.

And, what if I am the owner of the asset, but don’t actually have it on me? Maybe I’ve lent it out to a short-seller or used it for collateral. It might take me a bit of time to unwind that commitment to be able to transfer it to you. The requirement to have it on hand for immediate settlement could curb the growth of lending and collateralization, which would preclude the emergence of a sophisticated market.

To highlight the point, a few years ago the Moscow stock exchange moved from same-day to two-day settlement, in what was touted as a “modernization.”

So, speed in settlement may reduce risk, but it adds a degree of inefficiency.

Blockchains are not fast

Now let’s look at the misconception that a blockchain-based transaction would be faster than one on traditional rails.

Blockchains are much slower than centralized databases. The technology involves validation of a transfer by the entire network, and, depending on the relevant blockchain’s consensus algorithm, could take somewhere between a few seconds and some minutes.

Even private blockchains, which do not have the same consensus considerations, have some degree of latency.

On the other hand, trades on traditional markets take nanoseconds.

Settlement is not faster, either. Last week the Bundesbank released the results of a series of trials it performed with Deutsche Borse which tested blockchain technology vs traditional rails in financial settlement. The blockchain-based system lost in terms of speed and cost.

Technology is not the problem

But, of course, blockchain-based settlement must be faster than traditional settlement – blockchain cuts out middlemen, right? Fewer steps should mean faster transfers of assets and payment.

Perhaps, but the number of steps and middlemen is not a technology issue. It’s about processes, and they evolve over time in response to problems and circumstances. Moving to a blockchain-based transfer and settlement system will not necessarily solve these problems. As we saw earlier, instant settlement is not always desirable.

So, expecting a new type of asset to “solve” a problem that isn’t really there, with technology that isn’t faster, is placing unrealistic expectations on an emerging concept.

And unrealistic expectations will not help these new assets find their market.

What is needed?

What that market will look like is still unclear. What is clear is the sector’s rapid evolution and its potential to help reform capital markets through the spread of blockchain-based assets and settlement.

For that to materialize, however, several things need to happen:

  • Standards need to be adopted across the sector to ensure interoperability and the smooth transfer of assets and funds.
  • Regulation and/or oversight needs to be crafted to prevent fraud and a dangerous build-up of risk.
  • Stablecoin markets need to evolve to enable immediate payment without having to rely on fiat transfers.
  • And smart contracts need to develop to ensure the reliable transfer of ownership and rights.

All of the above is likely, but even once in place, there is no guarantee that security tokens will trade and settle faster than traditional assets.

Unlike in nature, the evolution of financial markets has shown us that speed is not always in our interests.

In finance, efficiency and resilience are more important than “winning” – just ask the tortoise and the hare.

Cars speeding on freeway image via Shutterstock

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CMA CGM

IBM, Maersk Finally Sign Up 2 Big Carriers for Shipping Blockchain

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Shipping blockchain TradeLens, developed by IBM and Maersk, has finally recruited two major marine cargo carriers to the platform after its early marketing efforts floundered.

The new additions are Mediterranean Shipping Company (MSC), the second largest after Maersk; and CMA-CGM, the fourth largest in terms of cargo carrying capacity.

MSC and CMA-CGM join other carriers Asia’s Pacific International Lines (PIL), Zim Integrated Shipping Services, and Maersk subsidiary Hamburg Süd, which, when combined, account for nearly half of the world’s ocean container cargo data, IBM said.

TradeLens also hosts over 100 supply chain operators from the shipping and freight forwarding world including port authorities, cargo owners and so on.

But the achievement of bringing a couple of Maersk’s very large rivals on to the IBM platform roughly a year after launch should not be underestimated in an industry with narrow margins for IT revamps and an inherent distrust among competitors.

Indeed, TradeLens experienced difficulties at first attracting rival carriers to the platform over concerns from some quarters that IBM and Maersk owned the intellectual property in a joint venture.

Still a joint venture

These concerns are somehow being addressed, but in such a way that did not come down to a matter of having to share actual ownership of the platform itself. According to an IBM spokeswoman:

“IBM and Maersk continue to be the sole owners of the TradeLens platform. The nature of an effective blockchain is to create an environment where multiple parties, often competitors, want to co-exist. Both CMA CGM and MSC are participating on the advisory board as part of the shared commitment to open governance.”

Marie Wieck, the general manager for IBM Blockchain, said Big Blue has simply stuck to its blockchain architectural principles of open source collaboration, emphasizing that everyone owns their own data and has the authorization to permit who gets to see that and what the privacy implications are.

Wieck told CoinDesk:

“They [carriers] they took a good hard look at this and saw the clear benefits of joining. This is real momentum that you are seeing in the market play out here. Now with CMA and MSC it really has reached a tipping point in terms of market maturity.”

CMA CGM and MSC will operate a blockchain node on the Hyperledger Fabric-based distributed ledger and participate in consensus to validate transactions. As such, the carriers will assume the critical role of acting as Trust Anchors, or validators, for the network. In addition, CMA CGM and MSC will be on the TradeLens Advisory Board to help promote the neutrality of the platform, said IBM.

Rajesh Krishnamurthy, executive vice president for IT and transformations at CMA CGM Group, said in a statement: “We believe that TradeLens, with its commitment to open standards and open governance, is a key platform to help usher in this digital transformation.TradeLens’ network is already showing that participants from across the supply chain ecosystem can derive significant value.”

André Simha, chief digital & information officer, MSC, added: “The TradeLens platform has enormous potential to spur the industry to digitize the supply chain and build collaboration around common standards. We think that the TradeLens Advisory Board, as well as standards bodies such as the Digital Container Shipping Association, will help accelerate that effort.”

Cargo ship image: Shutterstock

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Banking

IBM Blockchain Finance Lead Jesse Lund Is Leaving the Firm

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Jesse Lund, IBM’s global head of blockchain for financial services and digital currencies, is no longer working for the company.

A spokesperson for IBM confirmed Lund’s departure via an email to CoinDesk:

“I can confirm that Jesse Lund is no longer employed by IBM. IBM’s practice is not to discuss the specifics of employee departures.”

A former banker, Lund harbored an ambitious plan to bring cryptocurrency into the enterprise world and also to explore stablecoins and central bank digital currency.

He spearheaded IBM’s World Wire payment network which used the Steller blockchain to help banks remove pain points from cross border payments. Lund, previously a senior vice president of innovation at Wells Fargo, had enticed six banks onto the World Wire platform including Philippines-based RCBC, Brazil’s Banco Bradesco, and Bank Busan of South Korea.

The World Wire platform has payment locations in 72 countries, with 48 currencies and 46 “banking endpoints” (which include banks and money transmitters) where people can send or receive cash, IBM said in March.

Prior to joining IBM, from mid-2015 to the start of 2017, Lund was part of the executive steering committee of distributed ledger technology (DLT) provider R3, where he helped build partnerships, and represented Wells Fargo’s interests on R3’s growing Corda platform.

Asked if Lund’s departure would affect the Stellar/ World Wire partnership, Jed McCaleb, co-founder of Stellar, told CoinDesk:

No, we are still full steam ahead with World Wire.”

IBM pic via Shutterstock

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Banking

Blockchain and Financial Services Lead Jesse Lund Leaves IBM

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Jesse Lund, IBM’s global head of blockchain and financial services, is no longer working for IBM, the company confirmed.

A spokesperson for IBM confirmed Lund’s departure via an email to CoinDesk:

“I can confirm that Jesse Lund is no longer employed by IBM. IBM’s practice is not to discuss the specifics of employee departures.”

Lund harbored an ambitious plan to bring cryptocurrency into the enterprise world and also to explore stablecoins and central bank digital currency.

He spearheaded IBM’s World Wire payment network which used the Steller blockchain to help banks remove pain points from cross border payments. Lund, who previously a senior vice president of innovation at Wells Fargo, had enticed six banks onto the World Wire platform including Philippines-based RCBC, Brazil’s Banco Bradesco, and Bank Busan of South Korea.

The World Wire platform has payment locations in 72 countries, with 48 currencies and 46 “banking endpoints” (which include banks and money transmitters) where people can send or receive cash, said IBM back in March of this year

Prior to joining IBM, from mid-2015 to the start of 2017, Lund was part of the executive steering committee of DLT provider R3, where he helped build partnerships, and represented Wells Fargo’s interests on R3’s growing Corda platform.

Asked if Lund’s departure would affect the Stellar/ World Wire partnership, Jed McCaleb, co-founder of Stellar told CoinDesk:

No, we are still full steam ahead with World Wire.”

IBM pic: Shutterstock

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