Blockchain and Disintermediation

Much has been written in the last year about Distributed Ledgers, Blockchain and the potential impact that they might have.   More recently has come the news of the amount of investment being put into Blockchain technology; both from the Fintech sector and the large Investment Banks.  One of the known major challenges that a distributed ledger system brings, is its ability to span geographical borders and, therefore, the rules and laws that may be specific to particular jurisdictions and how they can be enforced in this new world. Sanctions and AML rules are a specific example that spring to mind.

Yesterday’s announcement by Earthport Plc of the enhancement of its services to “enable real-time cross-border payments via distributed ledger protocol” via a partnership with Ripple Labs ( has the potential to move things forward in this space given the stated ability for clients to maintain their compliance regimes. The fact that Earthport currently focusses on low value cross-border payments should not take away from the broader opportunities and impact that could arise here.

I must emphasise that I have no relationship with either Earthport or Ripple Labs or any other party in this field.   However, my background in those Market Infrastructures backing the settlement of equities, FX and payments means that I can highlight the potential disintermediation or “disruptive” impact that such advances could bring. For me, the key question is whether we are now seeing the birth of the next iteration of Market Infrastructures and, if so, what happens to the existing ones?

In terms of context, it is less than twenty-five years ago that a raft of Real Time Gross Settlement Systems were built by the major Central Banks (some countries are still in the process of building them) and these provided the foundation stones that permitted settlement systems to access them for real-time, safe, secure settlement (see my last post on Finality in the Payment Chain).   A number of domestic settlement systems were then created, many of which were subsequently subsumed into the major international systems that are around today (eg Euroclear, CLS etc).   It can be argued that these were the first major “disruptors”, creating faster, more cost-effective and more secure means for settlement to take place (either on a domestic or international basis).

New guidelines for their operation were created (under the Bank for International Settlements (BIS) and its subordinate Committee for Payments and Settlement Systems (the CPSS – now renamed the CPMI (Committee on Payments and Market Infrastructures)).   This Committee comprises of the main Central Banks (see and works closely with other key organisations such as the Financial Stability Board (  It is only three years since the latest set of “Principles for Financial Market Infrastructures” were published (, which provide the minimum standards across a number of key areas (ranging from Governance to processes around Operational and Liquidity risk) that Financial Infrastructures are expected to comply with and form the basis for assessment by those regulatory bodies responsible for their supervision.   Most key Financial Market Infrastructures are obliged to comply with the PFMIs, with some jurisdictions (eg the Eurozone) only publishing their requirements in this area as recently as last year.

The point of stating the above is to highlight that it is only very recently that the applicable standards and associated regulatory approaches have sufficiently evolved to enable the existing Financial Market Infrastructures to (a) put in place the necessary controls and (b) to be supervised in a consistent fashion to provide the necessary level of comfort to those who are reliant upon them for the safe delivery of settlement services on a daily basis.   These processes move slowly (sometimes by necessity due to the need for legal alignment and sometimes down to the sheer logistical challenge of geography and resources). They now potentially risk being overtaken by the evolution of the next set of “disruptive forces”.

A key question is how large does a new “system” or “combination of systems” need to be before it is considered to be a Financial Market Infrastructure? Are we likely to see those entities who are rapidly moving forward in the payment and settlement space likely to fall within that definition themselves (whether they want to or not) and, therefore, the purview of the international authorities for supervision and oversight (assuming that it is felt appropriate for them to be overseen in the same manner as before)?   Does the nature and manner of their operation mean that the existing regulatory standards need to be reviewed again and, if so, in what timescale?

The latest advances will undoubtedly bring impact in the Market Infrastructure space. That is natural evolution which should be seen as an opportunity rather than a problem.   There is though the final question of what happens to the existing Financial Market Infrastructures?    Do they evolve themselves and become adopters of the new technology or should we expect a natural transition to replacement infrastructures?   That brings with it its own challenge; the cost of running the existing infrastructures should not be underestimated and, in most cases is fixed given the regulatory standards they must comply with.   As such, economies brought to their users is often a volume game and if some of this volume is moved elsewhere (think of a long balloon being squeezed), the cost just goes up somewhere else.  It should also not be forgotten that a lot of the existing Financial Market Infrastructures are “not for profit” industry owned entities which is a very different structure to those driving the pace of change at present.

If ever there was a good reason to “watch this space”, the changes now afoot would be a good justification.