Jul 6, 2016
Barefoot Innovation usually explores technology that
touches financial consumers - new products and new ways of managing
money. Today's episode pivots 180 degrees and looks internally,
inside financial companies, at the equally transformative change
underway in how financial products are made and
delivered.
My conversation is with Blythe Masters, CEO of Digital Asset
Holdings, and our topic is the blockchain --
distributed ledger technology, or DLT.
Most of our listeners know that the blockchain, created by
the inventors of Bitcoin, is expanding far beyond digital currency
and has revolutionary potential for changing how society
operates. Any complex system that keeps records or involves
chains of transactions - payments, contracts, titles, tickets,
warranties, exchanges of all kinds, government records, medical
information, purchasing systems - anything -- can potentially be
managed through distributed ledgers that can eliminate most of the
current costs as well as errors, uncertainty, and fraud. DLT can
also enable trustable transactions among parties who don't know
each other, without need for a trusted intermediary. That's because
safeguards are built into the technology itself, by making all the
records and transactions transparent to all parties and preventing
duplication or fabrication of information.
Blythe Masters says she began as a skeptic because, like many
people, she equated the blockchain with Bitcoin and, given
Bitcoin's colorful developments, dismissed both. However, after
leaving her long career as a senior executive at JPMorgan Chase,
she took a closer look and became a convert. Today she's leading
one of the most exciting and
best-financed firms
in the field, Digital Asset Holdings in New York.
We had a chance to sit down together at the 2016 Fintech
Forum of Women in
Housing and Finance in Washington, where she
shared her vision for the power of DLT to transform the internal
operations of banks.
Note that DLT systems can be either open-access and
"permissionless," moving information on the open internet as with
digital currency, or can be closed and "permissioned" within a
single organization or a gatekeeping group that shares a common
need. (For more on open systems and digital currency, see our
episode with Jeremy Allaire of Circle.) Large banks are
actively exploring use of closed DLT systems to streamline their
internal operations to cut out expense, mistakes, and the slowness
caused by the need for reconciliation of records. These efforts
will bring enormous cost savings, for three reasons. First, the DLT
system is simply cheaper to operate. Second, it eliminates many
kinds of errors - and preventing, detecting and correcting errors
is a massive source of expense in every financial company. And
third, reducing delay will also reduce the need to hold capital
against the risks that attend pending transactions.
I would add that DLT will, over time, open up the opportunity
to modernize and streamline regulation itself, through use of
"reg-tech" relies on automated data in many areas that are now
subject to expensive traditional examination.
Blythe thinks DLT is coming to banking much faster than
people think - that these solutions will be in commercial
deployment in just two years! One reason is that banks can
modularize them, dropping DLT into functions that need it and then
connecting them up with the other, older systems.
She makes another interesting argument, which is that those
notoriously outdated old systems are going to have to be replaced
soon anyway. Many are about thirty years old use computer languages
no longer taught in college. The industry will have to invest in
new technology, and DLT solutions will fortunately be ready at just
the right time to permit a real leap forward in efficiency and
effectiveness. Blythe also says regulators are thinking right about
these challenges and have the right tools to manage
them.
Her company is focused on banks' non-consumer activities, but
think about the impact of these changes for everyone. Smart phones
are demolishing the cost structure of delivering financial
services, worldwide. Simultaneously, DLT is demolishing the cost of
manufacturing and servicing them. The combination will bring vastly
more efficient, affordable and accessible services.
Blythe Masters is a fascinating person. She was previously a
senior executive at J.P. Morgan, where she started as an intern and
spent 27 years. In 2007 she was named head of Global Commodities,
and left the firm in 2014 upon the unit's successful sale. She had
also been responsible for the Corporate & Investment Bank's
Regulatory Affairs, and was a member of the J.P. Morgan Corporate &
Investment Bank Operating Committee and previously the firm's
Executive Committee.
From 2004 to 2007, she was Chief Financial Officer of the
Investment Bank. Previously she headed the Global Credit Portfolio
and Credit Policy and Strategy. Earlier positions included head of
North American Structured Credit Products, co-head of Asset Backed
Securitization and head of Global Credit Derivatives
Marketing.
From 2012 to 2014, Blythe was chair of the Global Financial
Markets Association (GFMA). From 2008-2010 she was chair of the
Securities Industry and Financial Markets Association (SIFMA). She
currently chairs the board of Santander Consumer USA Holdings and
serves on the boards the Breast Cancer Research Foundation and the
Global Fund for Women. She is an avid amateur
equestrian.
Her efforts have long generated interest and buzz, including
this feature story in Bloomberg, others in
Fortune and
CNBC, and a Financial
Times story
on her company's blockchain test with Chase.
In our discussion I quoted from an
invaluable report on
DLT by the Bank of England. Here is the quote I cited in our
conversation - the report's opening lines:
"The
progress of mankind is marked by the rise of new technologies and
the human ingenuity they unlock. In distributed ledger technology,
we may be witnessing one of those potential explosions of creative
potential that catalyse exceptional levels of innovation....that
could prove to have the capacity to deliver a new kind of trust to
a wide range of services."
Please enjoy this thought-provoking conversation with Blythe
Masters.
Support the podcasts - A buck a
show!
I've decided to distill a lesson from the popular podcast
series
Hardcore History, by emulating their habit of
asking everyone to send them "a buck a show." Some years ago, the
show's host Dan Carlin realized the podcast was taking over his
life - much as Barefoot Innovation has been doing with mine! He hit
on the idea of asking listeners for "a buck a show," and eventually
reached the point where he can devote himself to producing the
series. Barefoot Innovation is produced part-time by me and two
young, very talented helpers. One of them has a day job and the
other is a full-time graduate student. If all our listeners will
chip in a buck a show, we'll be able to expand our interviews,
accelerate our pace (believe it or not, we currently run at a four-
to five-month backlog from recording date to posting!), and be able
to do some fun new things we have in mind for you. We'll appreciate
any and all help to keep the show going, and growing!
And remember to post a review on iTunes.