Responsible Innovation in Financial Markets: Observations from the Trenches, Part II

Editor’s note: Manoj Ramia is Digital Asset’s General Counsel. In Part I of our Responsible Innovation blog series, we discussed the importance of responsible innovation in financial markets, blockchain’s role in fostering this responsible innovation, and what sets Daml and Canton apart among blockchain technologies. In Part II, we share our observations about responsible innovation in financial markets based on our experience deploying our Daml and Canton blockchain technologies for production use at major financial institutions. 

Digital Asset is proving with its Daml and Canton technologies—and their unmatched privacy capabilities—that blockchain technology can be used to solve real problems and foster responsible innovation in financial markets. No other blockchain technology is in such wide use in production systems at major financial institutions. 

Goldman Sachs is using Digital Asset’s technology for its digital asset platform, GS DAP™ , which cuts down the time to issue bonds from five days to less than 60 seconds. Broadridge is using Digital Asset’s technology to run its distributed repo platform, DLR, which processes over $50 billion in average daily volume. Deutsche Börse is using Digital Asset’s technology to run a digital securities issuance platform, D7, that complies with Germany’s Electronic Securities Act. We’re also seeing more engagement from government entities. In the U.S., the NY Fed and several member banks are exploring Digital Asset’s technology for tokenized deposits for a regulated liability network (RLN). 

From this vantage point, three observations stand out:

1. Data reconciliation, not disintermediation

The problems driving innovation are the boring ones, like data reconciliation. The purported problems that grab headlines, like disintermediation, are not necessarily relevant and are perhaps even counterproductive (for example, there are benefits to central clearing in treasury markets). ​​Many of these boring problems exist because the technology underpinning the financial system today is simply an artifact of what was available as the financial system moved away from paper records. Even as technology improved, it could only be used in a way that structurally tracked old, paper-based recordkeeping systems. But blockchain technology can allow financial institutions to move beyond this skeuomorphism by enabling the creation of ledgers that are shared across market participants.   

2. Privacy and control over data are paramount

While shared ledgers are appealing, the problem is that they can pose serious privacy challenges. A shared ledger, where all of its contents are visible to everyone, is not a workable solution for financial markets. Instead, each market participant needs to have granular control over who can see each aspect of a transaction. Unfortunately, most blockchain technologies do not provide this privacy and granular data control and so are not suitable for financial markets. And purported solutions like zero knowledge proofs and rollups don’t actually address the problem, as they are really scaling solutions rather than privacy solutions. Only Daml and Canton have privacy and control over data built into their core architecture and thus provide a viable blockchain solution for financial markets. This is a key reason why no other blockchain technology is in such wide use in production systems at major financial institutions. 

3. Ask the right questions

The problem with many discussions today about blockchain is that they are clouded by false dichotomies that are not necessarily technological constraints and that are not responsive to real problems faced by financial institutions. 

Debates over whether to choose permissioned versus permissionless networks, or centralized versus decentralized architectures, can amount to pushing technology in search of a solution and miss the point. Rather than debate what technology to use, the point is to determine how technology can be used to solve real problems faced by financial institutions, and to focus on the value and utility provided by technology, all within regulatory constraints. With Daml and Canton, Digital Asset has focused on developing technology that solves the problems financial institutions face today, rather than simply pushing technology in search of a solution. 

Many debates about regulation similarly miss the point. Rather than ask whether or not new regulation is needed for a given technology (or, implausibly, whether new technology makes regulation unnecessary), the point is that regulation should be, as Michael Barr, the Fed’s Vice Chair for Supervision, put it, “based on the principle of same risk, same activity, same regulation, regardless of the technology used for the activity.” 

So the question to ask should instead be: how can financial institutions use new technology in a way that follows existing regulatory principles and enables better and easier regulatory compliance? With our technology being used in Deutsche Börse’s D7 platform in compliance with German law and the NY Fed’s exploration of a regulated liability network, Digital Asset is showing that Daml and Canton can be used for innovative yet regulatorily compliant solutions. 

Where do we go from here?

Just because we are justified in being cynical about financial innovation doesn’t mean that we should dismiss all financial innovation. And our response can’t simply be to not innovate; the technological infrastructure supporting financial markets is aging and isn’t designed for the growing complexity of the global financial system. Instead, we need to innovate responsibly, focusing on solving real problems and doing so within regulatory guardrails. 

And this responsible innovation is already happening today, outside the spotlight. Rather than pursuing lofty, idealistic solutions, major market players have been using Daml and Canton to develop blockchain solutions grounded in and informed by reality. These solutions don’t always grab the headlines. And their immediate benefits may not be apparent to anyone except those well-versed in the intricacies of the financial system. But from our vantage point—no other blockchain technology is in such wide use in production systems at major financial institutions—we know that the most important thing is to solve real problems faced by financial institutions. 

With this approach at our foundation, and bolstered by both the unique privacy capabilities of Daml and Canton and the network effects of interconnected Daml applications, we are enabling major market players to leverage the benefits of blockchain technology, especially programmability, composability, and tokenization. By continuing on this path, one project at a time, market participants can innovate responsibly and ensure that we continue to have a safe, sound, and fair financial system.