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David Schwartz
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Is Securities Finance Blockchain Even Possible?

The Walmart/IBM Foodtrust deals with a food-store range of item-instances in a finite supplier-line. It's been a significant innovation, but it's not overly complicated. Any average consumer can envision the standard data model. 
 
The Maersk/IBM blockchain has even fewer variables. Big ships with encoded cargo lists moving around a handful of deep-water ports with a schedule measured in weeks. Simple.  
 
By contrast, securities finance deals with 90,000 securities traded by tens of thousands of intermediaries in dozens of complicated regulatory regimes. The fact that securities markets have moved from paper-based certificates to entirely digitized tokens is a monumental achievement. That it all happened in just the span of one generation is truly astounding. 
 
But can a securities-finance level of complexity be recorded by a blockchain? 
 
It would have to be permissioned and governed, of course. And the sensitive fields would need world-class encryption. Plus, there might still be uneasy valuations for the hardest-to-borrow securities. Trends based on those values would have to pass a test of selectivity bias that would be credible to borrowers. 
 
So, not so simple.
 
But if such a blockchain could be built, what would it do? Why build it?      
 
The standard response to that question by advocates in a more typical blockchain endeavor is to explain that the "golden record" would be available to reconcile proof breaks. And, yes, that would be useful. It is always good to have a transparent registry so that anyone can tally the assets and unwind the liabilities.*
 
But what is the value of that? And, more importantly, is that enough to warrant the effort and expense of building a blockchain in securities finance? 
 
Good questions. For which, the analyst would suggest, the answers lie in the data. How much would it cost to build record-keeping systems that would make the system safer? What would be the value of improved efficiency in terms of quality, speed, and accuracy? 
 
Data always provides an answer. Whether any answer is the right one, though, usually depends on where the questioner fits into the supply (and redemption) chain. 

 



 
 * Years ago, one Citibank stock transfer division lost control of the issued-and-outstanding shares in a registry it maintained for big corporations. Dividends were paid erroneously to those corporations' former shareholders because the paperwork overwhelmed the bank workers, who compensated by merely issuing new shares without taking the time to cancel the old shareholder records. Even though more money went out than came in from the clients, the bank kept rolling the omnibus-account balances in what amounted to an internal kiting scheme. (This continued until the SEC shut down the division, but that is a different story.) A golden record would prevent this kind of manipulation.

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