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Boston Fed VP: DLT Could 'Fundamentally Change' Financial Industry

Jim Cunha, senior vice president of the Federal Reserve Bank of Boston, has said that distributed ledger technology (DLT) could “fundamentally change” many areas of financial services.

In an article on the bank’s website, Cunha spelled out that innovations using the technology might bring advantages in payments and beyond, saying.

“DLT has the potential to fundamentally change many areas of financial services, payments being just one. Change is also very possible in securities (sales and post trade processing), derivatives, trade finance, and supply chain to name a few.”

The Fed has been exploring cryptocurrencies since 2011, and DLT for the past four years, according to Cunha. “We want to understand how [DLT] can impact the payment industry, since our mission is to ensure the efficiency, safety, and accessibility of payments in the U.S.,” Cunha noted.

However, while there are applications of DLT in the cross-border payments space, most work in that area is occurring outside the U.S, he said, adding: “So I think there is more potential for change there, but who knows what the future holds back home.”

The bank executive continued to explain that the central bank has been testing various new technologies in the field of payments, including check imaging technology and a chip-based prepaid card it has provided to the U.S. military. And while new technologies, such as data analytics, AI and machine learning, are disrupting aspects of the financial ecosystem, it is important to find the “right business case,” he said.

Earlier this month, Cunha told a fintech conference hosted by the Federal Reserve Bank of Philadelphia that blockchain technology will “wake up Swift and other middlemen”. He further described the Fed’s initiative to educate monetary policymakers, payments experts and regulatory specialists on the risks and potentials of blockchain technology.

Jim Cunha Image from CoinDesk archive 

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Boston Fed VP: Blockchain Will Wake Up Swift and Other Middlemen

“What’s the future of Swift?”

Since the rise of blockchain technology, the fate of the financial messaging platform has been at the center of discussions between startups and incumbents. However, the subject was raised again recently by a perhaps unlikely source: Jim Cunha, senior vice president of the Federal Reserve Bank of Boston.

A high-ranking official at one of the 12 institutions that comprise the U.S. central bank system, Cunha drew laughs at a fintech conference hosted by the Federal Reserve Bank of Philadelphia last week when he jokingly tried to defer the question to another panelist.

But despite the acknowledgment of how contentious that question can be, eventually, he answered, and in doing so, he showcased an acceptance of the changing role middlemen of all kinds will have to adopt to stay relevant as industries begin migrating to blockchains.

Cunha told the audience:

“Any incumbent, that’s a middleman – which the Fed is, stock exchanges are, Swift is, The Clearing House is – I wouldn’t say that the fintechs are going to put us out of business, necessarily. What they will do is wake us up in some cases to be a little more innovative with our systems in a way that’s positive.”

Ongoing work

Coming at the tail end of a speech Cunha gave on “Bitcoin, Blockchain and other Cryptocurrencies,” Cunha followed the remarks with new details about the The Federal Reserve Bank of Boston’s work with blockchain and his personal thoughts on what those efforts might eventually mean.

Specifically, Cunha described work ongoing inside the Fed to educate monetary policymakers, payments experts and regulatory specialists on the “risk and potential” of blockchain technology.

Included in that work are at least two previously unrevealed proofs-of-concept being built using Hyperledger Fabric and ethereum. While Cunha didn’t reveal many details about the PoCs, he did stress they were experiments only.

“In my lifetime we won’t put the platforms we’re building now into production. We’re trying to learn,” he said.

And one of the things Cunha and his team have learned is that cryptocurrencies are very different from the underlying blockchains on which they operate.

While the distinction is certainly not new, Cunha’s interpretation of that division shows how much outlook on the technology has evolved. Initially, the Fed seemed to lump blockchain together with bitcoin and other cryptocurrencies, assuming the bad reputation of the latter should fall on the former as well.

But, though Cunha understands the difference today, there are still areas of concern. For instance, he believes an increase in the number of regulated bitcoin exchanges has “driven a lot of bitcoin [users] to other currencies – monero and others that are built as harder to trace than bitcoin.”

In spite of his worries, though, Cunha said he argues for regulation that does not “squash the currency,” because “innovation is too important.”

Bridging the gap

And the only way that innovation will be fully realized, according to the bank official, is by increasing partnerships between financial systems new and old, both in terms of technology and people.

He pointed to efforts that have emerged directly from the banking world, including the Stella project, created in partnership between two central banks, and the Utility Settlement Coin project, run by a number of for-profit banks. He further mentioned projects such as Axoni’s work with the DTCC and Digital Asset Holdings’ work with the Australian Securities Exchange.

Specifically as it relates to Swift, though, Cunha noted the CLS consortium’s work on a project designed to work in harmony with payments messaging systems, using it as an example of how blockchain is pushing financial incumbents to become more cutting edge.

While there are nimble startups, said Cunha – pointing to Ripple (which has perhaps been the most aggressive in its pursuit of Swift’s market share) as an example of the kinds of business models that could ultimately prove more disruptive – partnerships between the two camps are the best way forward.

He concluded:

“The partnerships will be where the ultimate success is.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Axoni and Ripple. 

Image courtesy of Federal Reserve Bank of Philadelphia

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