The president and chairman of the board of Switzerland's central bank described a financial system "turned on its head" by blockchain and distributed ledgers to kick off the Sibos conference yesterday in Switzerland.
Addressing a crowd of some 8,000 financial industry professionals, Thomas Jordan lectured on the history of centralization as a means to provide security and efficiency in the banking industry, from the birth of centralized clearing houses in the 1940s to the advent of the Six Interbank Clearing system (SIC) in 1987.
But with blockchain and distributed ledgers "promising first and foremost to reduce cost", Jordan said the Swiss National Bank is now in discussions with market participants, regulators and other central banks about what to do next.
Jordan said of blockchain technology and distributed ledgers:
"Such systems could render the reconciliation of transactions and balance data between banks and the third-party system obsolete. The paradigm seems to have been turned on its head. Decentralization, not centralization, now appears to promise the greatest efficiency gains."
In addition to being president of the central bank, Jordan is on the board of directors of the Bank for International Settlements (BIS) in Basel and the governor of the International Monetary Fund (IMF) for Switzerland.
"The Swiss Central Bank is neutral vis-à-vis the technologies underpinning financial market infrastructure," said Jordan. "It assesses innovation in terms of their implications in terms of their fulfillment of its mandate."
A blockchain hybrid
But Jordan continued his keynote address by adding that he doesn't think all centralization will go away.
For example, he described existing financial market research structures as "already highly competitive," and an example of a "conventional centralized model" that "meets high safety standards and improvements are being made all the time."
Instead of a financial industry that is replaced by distributed ledgers, Jordan described a "hybrid scenario" where security information is settled on a distributed ledger and even opened up to the possibility of central banks issuing currency on a blockchain.
He added the latter "raises a host of settlement specific questions."
Jordan said:
"In the end, it may well see that we will see new technologies coexisting or blending."
Swift takes the stage
Following Jordan’s keynote remarks, Swift CEO Gottfried Leibbrandt presented the audience with another way blockchain could be built into the traditional financial infrastructure.
Specifically, he said Swift’s Global Payments Initiative, launched in December 2015, is considering blockchain among the ways it could be improved.
Originally designed to make payments faster and more transparent by creating a new service level agreement (SLA) rulebook between banks, GPI has signed up 80 financial institutions to its "active pilot mode," according to Leibbrandt, an increase from 45 earlier this year.
While the new SLA designed to streamline cross-border payments has proved alluring to the early participants, Leibbrandt said Swift continues to explore new more technological solutions.
He concluded:
"Who knows, some of them may be enabled by that same blockchain. We’re certainly looking at that as an underlying technology as well as other technologies, to keep enhancing that service."
Images via Michael del Castillo