Adam Ludwin, Co-Founder & CEO, Chain
Please give us a bit of background on yourself, and how your organisation plays a leadership role in the financial technology space.
Before starting Chain I was a venture capitalist investing in financial technology start-ups, including mobile banks, online payments and peer-to-peer lenders. In 2011 I read Satoshi Nakamoto’s original white paper on Bitcoin and was struck by the contrast between Bitcoin and the other areas of fintech. As important and impactful as those other innovations were, they were what I would describe as being at the top of the financial stack and built on the existing infrastructure. You still have credit card accounts and bank accounts and traditional currencies and asset classes. So while products like mobile wallets made things easier for the user, they didn’t really address some of the perennial problems about how financial services worked, in terms of efficiency and cost.
Bitcoin, even as a germ of an idea, was built from the ground up with the central premise of establishing a viable currency system based on the minimum internet-enabled process. As an investor, that was an 'aha' moment when I realised that not only is fintech important in a traditional sense but that it had the capacity to transform financial services from the inside out, not just the top down.
By 2013, and having spent two years continuing to invest in the area and actively studying Bitcoin, it felt like the technology had gained enough traction and that it was the right time to explore how we could apply the technology elsewhere in financial services. I was fortunate enough to team up with two co-founders who had a tonne of experience building out platforms for the enterprise and that was how Chain was born.
We launched our first service to developers in April 2014 and have been at it now for two and a half years. The core premise of the company is to transform the medium for financial assets by applying the same technology that was used for Bitcoin to digitise existing currencies and assets. If you think about Bitcoin, it's a whole new asset class and that challenges adoption because it requires people to embrace it and use it alongside their other assets. We can achieve many of the same benefits as Bitcoin, such as delivering native digital assets that can move over networks seamlessly, with fewer intermediaries, much higher security and at greater speed, at a lower cost. We can do all of that with existing asset classes and that's what matters.
We want to be able to move a dollar from here to Singapore instantly, we want to be able to settle a trade instantly. We want to be able to move a gift card around the commerce ecosystem safely without the risk of fraud. To achieve that, we focus on building blockchain technology that is applicable to financial services. We then partner with companies like Visa, Nasdaq, Citigroup to bring these innovations to market.
What do you think are the strongest use cases for blockchain technology in the financial services industry?
The areas that is most ripe for blockchain are areas of the market that have the most intermediaries. They will be the first to benefit from blockchain.
Commercial payments is one of a short list of very strong fits for the technology. The reason for that is if you look at how an international transfer is made today, it's essentially a two-tier process. On the one hand a SWIFT message is sent that says a party wants to send to a beneficiary. This message then taps into the correspondent banking system where that message prompts banks to transfer funds to other banks via their holding accounts. It's two parallel tracks - a messaging track and an accounting reconciliation track. The process tends to take several days and is expensive for the consumer.
What we want to have happen, that a blockchain uniquely enables, is to have those currencies in a natively digital format so that when they're sent to the beneficiary they can be sent directly. It also enables the asset to be transferred without copying. So there’s no duplicated data or need for an intermediary.
Visa will be launching a new network next year in the commercial payments arena to help companies pay one another internationally. That network they announced last month and that will be built on Chain's technology. It’s a great example of the promise of blockchain technology being fulfilled - businesses can pay each other securely no matter where they are in the world - using a new architecture that just couldn't be done 10 years ago.
Other examples include capital markets and the repo markets. A traditional bilateral repo in the US involves six institutions. That introduces a lot of friction and complexity. We would ask if we can streamline that. It’s the areas where there's a lot of friction that are getting transformed first.
It’s worth saying that there is a lot of inertia to combat in those markets. The incumbents and intermediaries benefit from the way things are currently set up and can be resistant to change. That means the way these technologies get to market is not a straight line. It takes a lot of thought, as an entrepreneur, to figure out how you have to make your impact, who you have to align with and how do you go about introducing your technology.
How well are financial companies adapting to the rapid pace of fintech development? What fields are furthest ahead of the game?
The banks have recognised the potential of blockchain technology very quickly. I would say that they can see the potential before that's been realised, in the same way that the record labels saw Napster and the transformative reality of that for their industry. The banks have done the same thing. Bitcoin was the financial services industry’s Napster moment.
Where they differ from the record companies though, is in their reaction. They haven’t tried to kill Bitcoin, but rather to say: 'Right, this looks interesting. How can we make better products and services?' I think that's a unique industry response. If you compare that to the record industry, the response was lawsuits. The industry has focused more on partnership than going on the attack and I think is a good thing.
Financial services is highly regulated and distribution matters a lot. So as a technology provider, partnership is inevitable. The question is how you are going to partner. The most successful fintech companies - Stripe or Square - have all integrated and partnered closely with the banks and card networks. Even though Bitcoin represents transformation from the inside out and the same will be true with blockchain, it's going to require partnership to get inside in the first place and actually start to make those changes.
What challenges do you see for fintech development and disruption from a regulatory standpoint?
The regulatory hurdles for fintech companies can be very high and at the moment they have two options. They can either focus on an area that is lightly regulated or where a licence can be acquired relatively easily. Gift cards are an example of that. The second is to partner. Most consumers think of Venmo as an iPhone app, but it's an iPhone app that they collaborated with a major bank on. It has now been acquired and is part of a much larger organisation in PayPal that has all the necessary money licences.
This is the situation facing fintechs at the moment although in the longer term I'm very optimistic that the regulatory environment will become more accommodative of fintechs.
Thomas Curry, Comptroller of the currency for the US Department of the Treasury, recently proposed a lightweight banking charter for fintechs. Whatever happens with that specific legislation, I feel that that's going to be the global trend over the next 5-10 years. I’m sure there’ll be hiccups along the way, but ultimately fintechs will be able to get regulatory approval. The current regulatory system is built for banks that haven't really changed their model since the year dot. Fintechs are very different in terms of security and potential and need to be regulated as such.
What impact do you think Brexit will have on the broader financial technology industry in the UK?
We have a team-mate who is an EU citizen and is going to run our European operations when the time comes. Our assumption had always been that he would do that from London but when Brexit happened, we had to start our thinking all over. Even though at the time we were 20 people in San Francisco working on our software we were already thinking do we need to go somewhere else or can we do this from London? Do we need to change our European office? I think we're going to change our European office; we're not going to do it out of London. It's interesting, it's having a ripple effect on people’s thinking across the industry that I think we’ll only see played out in the coming years.
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