Waters Wrap: The changing definition and perception of blockchain

About three months ago, one of our reporters, Theo Normanton, set out to examine Digital Asset Holdings—its past, present, and future. The thinking was this:

The blockchain revolution that was promised in the mid-2010s never materialized outside of crypto in the capital markets. When it comes to settlement, post-trade, and back-office workflows, it’s still just a lot of experimentation and low-level implementations—we’re nowhere near distributed ledger technology settling trades in large equities and options markets or replacing a firm’s legacy back-office technology. But there have been wins, and there are still believers—so the jury is still out on blockchain. (And yes, I will use DLT and blockchain interchangeably throughout this article, even though the latter is an example of the former.)

Similarly, when Digital Asset hit the scene in the mid-2010s, it quickly became the darling of the fintech world. A fever pitch was reached—not just at Digital Asset, but for the blockchain community as a whole—when DA poached Blythe Masters from JP Morgan in March 2015 to become its CEO. From there, the vendor landed the gig to replace the Australian Securities Exchange’s settlement and clearing system in January 2016. Well, Masters voluntarily stepped down at the end of 2018, and the ASX project fell apart spectacularly by the end of 2022. That said, Digital Asset’s Canton Network is now “live,” and it has won deals with Deutsche Börse and Hong Kong Exchanges and Clearing—so the jury must also still be out on Digital Asset.

Here is the result of that three-month investigation. If you want to understand the highs and lows of DLT development in the capital markets over the last decade, this is the definitive story.

What I’m going to write about here, though, has more to do with perception and definition. This piece was cut out of the story, but Digital Asset’s messaging in press releases and public appearances has changed through the years. And that’s fine—a startup needs to grow, learn, and adjust. However, the shifts in narrative has frustrated DLT skeptics in the capital markets.

Masters and Digital Asset proposed to use DLT to make financial services more efficient. Together, they made headlines. The Wall Street Journal followed the company’s fundraising efforts. Business Insider described DA’s senior leadership as “a dream team of new hires”. And the Financial Times—puzzlingly—reported that the company aimed to build a venue where transactions were settled in bitcoin, adding pointedly that the currency’s most ardent devotees “include libertarians and drug dealers”. All three put Masters’ credentials in the top line.

One source, a senior executive at a capital markets consultancy, says that Masters got Digital Asset a lot of attention across the industry, but it was still unclear what exactly the company’s long-term plans were. “I do remember when she took over Digital Asset and started to talk and give presentations—we all listened very intently. It sounded like she wanted to apply [DLT] to the back office of equities trading, but that made no sense to me,” the executive says.

We’re already becoming what we never wanted to be—we aren’t cyberpunk anymore

Senior manager at a blockchain consultancy

The company’s crisis of identity was borne out in its early press releases. In June 2015, it described itself as “a technology company that uses distributed ledgers to track and settle both digital and mainstream financial assets”. In September, it was “a technology company that brings 21st century technology to existing financial infrastructure”, and by December, it had settled on “Digital Asset builds distributed, encrypted straight through processing tools. Our technology improves efficiency, security, compliance and settlement speed.”

I remember speaking with Shaul Kfir, then Digital Asset’s chief architect (now COO) and cofounder, in October 2021. I told him that it sounded to me like Digital Asset is more about its smart contract programming language, Daml, and less about building pure DLT/blockchain networks.

From that column: I tell Kfir that the way I see it, Daml is akin to how FDC3 is used by the likes of OpenFin and Cosaic [now Open.io] to build their app interoperability environments/browsers/containers/whatever. It’s not about creating the pristine DLTs of bitcoin and Ethereum fame, but more about the programming language that creates smart contracts for finance. OR…maybe I have it confused—maybe Daml is the DLT and I’m not connecting the dots properly. So which is it? “It’s a little of both,” he said, to which I exclaimed, “And that’s why it’s difficult to understand the space!” He laughed and acknowledged the point.

And from the story that Theo wrote, Digital Asset’s CEO, Yuval Rooz, had this to say: “What you will see in our press releases is much more focused on the business problem that we’re trying to solve and how we’re solving it. And I would say that as a result of that, you will see less and less about DLT. … I don’t think that the technology matters, as long as you achieve the business outcome.”

Also from Theo’s story, this is from a senior digital assets specialist at a large sell-side institution: “The sentiment around enterprise blockchain implementations at banks is that management are saying, ‘The time for experimentation is over—we need to see real use-cases, real revenue, real cost savings. Otherwise, it feels like patience is wearing a bit thin. This has been a topic for five to 10 years, there’s been a lot of money invested. And I feel from some of the teams we talk to an urgency to make it profitable, to make some use-cases work.”

So, the thesis is this: When blockchain hit the scene, the technology that was underpinning the bitcoin shooting star was promised (by some, at least) as a panacea for all of a bank’s back-office ills. That led to banks opening up the purse strings for a little DLT exploration in the hopes of cutting down on the cost and inefficiency of woefully underfunded back offices.

Many years have gone by, and back offices haven’t seen revolutionary change, and they are still underfunded. And senior executives—as the digital assets specialist noted previously—at banks are wondering why blockchain/DLT hasn’t delivered on its promise. At the same time, generative AI is capturing the imagination of those same senior execs. As are cloud, open source, APIs, interoperability, and new ways of delivering analytics and context. The question is now becoming—with tech budgets being largely flat or slightly rising—can DLT assist with any of these more proven technological advancements to improve workflow, efficiency, money savings, and alpha generation? If the answer is no, let’s move on.

The message

None of this is Digital Asset’s fault. In fact, while I consider myself to be a DLT skeptic, I appreciate the gumption and pluck of DA’s founders to try and bring efficiency to a wildly manual and underinvested portion of the capital markets. And please note that neither this column nor Theo’s incredibly well-reported feature is saying that Digital Asset won’t ultimately succeed. Rather, it’s the perception problem. And the definition problem. What are the tangible results from all these years of investment? Is it still experimental? Well, cloud and AI are more real and proven, and budgets are finite.

Now, think back to that quote from Rooz before: “What you will see in our press releases is much more focused on the business problem that we’re trying to solve and how we’re solving it. And I would say that as a result of that, you will see less and less about DLT. … I don’t think that the technology matters, as long as you achieve the business outcome.”

Let’s dig into that a bit more. In the course of Theo’s reporting for the Digital Asset feature, a senior manager at a blockchain consultancy told him that the industry today is unrecognizable from the one they entered at the height of the hype. The optimism has evaporated, they said, as has the sense of a cultural and technological revolution—building the future of the capital markets from the ground up. As a result, the source told Theo that they have decided to quit their job and launch a startup in the hope of chasing the excitement that they feel the DLT world has lost. “We’re already becoming what we never wanted to be—we aren’t cyberpunk anymore.”

And a lawyer (perhaps the exact opposite of cyberpunk) who has worked closely with several blockchain startups noted that they’ve seen similar “evolutions” to Digital Asset’s.

“They (Digital Asset) have had quite a few pivots at least in terms of their focus,” they told Theo, from crypto to enterprise blockchain, from Daml to Canton. “At the end of the day, all of these blockchain projects just became ways to upgrade software—upgrade back-office systems by another name. [Bank execs can say] ‘Let’s take a fresh look at things. Look at how redundant we are; look at how much paper we’re using; look how error-prone this is! Let’s automate; let’s streamline—and we can call that blockchain…or something!”

Definition matters. In his article, Theo explored the differences (and discrepancies?) between the idea of a public versus a private blockchain. While targeted use cases have slowly been rolled out for repo and collateral management, many of the people I speak to say that appetite will never be there for equities, options, and FX. And that comes down to public versus private.

Today, the majority of known DLT implementations in capital markets are private blockchains—or some other fancy terminology that, essentially, means private. So, for repo systems, trading systems, and margin systems, DLT owners get to decide who has permission to use those systems and validate transactions on their network. But if you already trust the market participants you do business with, what’s the point in making the effort to move to blockchain technology? Why not just have a write-only database, which banks have been using for nearly a half-century? (Maybe that last point is the reason, but for many in the industry, why take budget away from other projects for something that works?)

A former employee of Digital Asset told Theo that the debate on public/private blockchains will not be resolved organically. “You’re going to need a regulatory body or a monster financial operator/intermediary to come in and say, ‘This is the only way it can happen,’ before you’ll get consensus.” Now…who thinks that day is coming in the next, say, decade, especially with the advent of commercialized quantum computing on the horizon?

Finally, digital assets (lowercase “d” and “a”), cryptocurrencies, and tokenization will very much play a role in the capital markets of the future. As such, DLT will, too. But for the skeptics, the back-office and equities/options settlement revolutions have been televised, and the suits are talking about shelving the show indefinitely.

Maybe you agree with that statement—maybe you do not. But I think the way that Digital Asset presents itself to the public now and in the future will prove a good indicator of that statement’s truth.

The image accompanying this column is “Twilight in the Wilderness” by Frederic Edwin Church, courtesy of the Cleveland Museum of Art’s open-access program.