How Blockchain Has Revolutionized the Finance Industry?
Interviewee: Greg Schvey
Co-founder of Axoni
Interviewer: Charles Chang
Deputy Dean of Academics, Professor of Finance and Director of the Fintech Research Center at Fanhai International School of Finance, Fudan University
Blockchain, in many ways, started as a technology on the fringes of the industry, initially invoking images of “Burning Man” and server farms pumping out Bitcoins. Many early adopters and pundits viewed it as a technology that would work outside of what they considered the existing hegemony, one that would rage against the industry rather than play a role in its evolution. Early applications like the Bitcoin and ICOs sought specifically to avoid existing regulation but also exhibited its limitations for the same reason.
As the world has come to understand the technology and its applications in a richer way, Blockchain has become a part of ecosystem-building and has brought together the finance industry and community, rather than serving only those outside of it. It is providing platforms for information sharing, self-regulation, risk monitoring, and investor protection—to the betterment of all.
One of the early adopters and pioneers in this transformation is Greg Schvey, founder of TradeBlock and founder/CEO of Axoni. In this talk, we hear about his journey and his views on the future of Blockchain in the Finance industry, in his own words.
Blockchain from then to now
Charles Chang: What are the key changes since Satoshi that are accelerating adoption in the finance industry? How would you describe the transition from when you originally got interested in Blockchain to where it’s come today?
Greg Schvey: I was originally introduced to bitcoin in 2011 by Jeff, my brother and co-founder. At the time, the community was limited to the members of a couple of online message boards. It was a small but passionate group with a few standout characters from across the globe. The notion that all of the infrastructure based on blockchain tech today originated from an anonymous inventor and subsequently pushed forward on internet forums is something most people today may not be aware of.
Even outside of Blockchain, there is a broader secular trend of technology adoption in finance, including the increasing use of third-party services and/or software where costs can be mutualized across the industry, rather than everyone dealing with the expense, headache, and risk of building and maintain everything on their own. By using external software providers, trading firms can spend their energy generating alpha instead of building the same systems as everyone else. This could be said of nearly every part of a financial institutions’ infrastructure, from servers to risk engines to user interfaces.
The biggest impact though has been from the advancement of Blockchain’s practical application in capital markets after much experimentation and iteration. With every new technology there is an adoption curve, with a few forward-thinking users pressing forward early on and the rest of the cohort catching up eventually. Those early adopters tend to be more forgiving of temporary technical deficiencies and are concerned less about social validation, preferring instead to play a role in technological evolution. With networks now available to immediately offer benefits to end users, the barrier to entry has fallen substantially.
Charles Chang: How would you characterize the state of adoption for Blockchain?
Greg Schvey: We’re definitely still early in what is most likely a 10-20 year trend.
Charles Chang: How are banks viewing Blockchain adoption?
Greg Schvey: Like any advancement, there is a spectrum of views. In our experience, most have come to view enterprise Blockchain infrastructure as an important alternative to traditional database and network systems, though where each bank is (or each group within a bank) differs. Banks have warmed to conversations about cryptocurrencies, but are generally much more hesitant to get involved due to various regulatory concerns. I think incentives to participate in infrastructure provision or network use will draw on more traditional incentive structures rather than on tokens or cryptocurrency.
Charles Chang: How are investors viewing it? Has Blockchain been de-mystified and what are the key reasons?
Greg Schvey: Other than venture investing, it’s still difficult to get exposure to the enterprise Blockchain market since most of the companies are private. Interest in cryptocurrencies varies widely and remains largely a retail market. More recently, we’ve seen an increase in institutional investor interest in cryptocurrencies now that trusted custodians, exchanges, trading counterparties, and other infrastructure providers have begun to emerge.
Charles Chang: What has helped adoption? What are key reasons for hesitation?
Greg Schvey: The biggest shift in the last year or so is that adoption of the technology has been de-risked by virtue of the increasing proof points and market knowledge about how these systems work. The repeated validation and market familiarity makes conversations with decision makers much easier.
Our own work in credit derivatives gave the market insight into how our technology works, and our work in equity swaps showed the world that successful deployment and tangible benefits are possible. It helps to have real world applications to help explain new systems or processes, as it makes the technology much more relatable for end users.
On the Axoni from then to now
Charles Chang: How did you start Axoni? What was its original mission and has that evolved as well over the years?
Greg Schvey: The company was originally called TradeBlock and provided tools for institutional traders in the digital currency markets. Essentially, TradeBlock provides a single interface that unifies the data and interactions for firms that may be executing trades at various different exchanges, have multiple wallets, have potentially thousands of over-the-counter counterparties, and many people on their team across many roles.
We spun that company out in 2016 and it has since become the world’s leading provider of post-trade infrastructure for digital currencies. As we built out those tools, we realized the underlying protocols could open a world of efficiencies, and eventually we began to focus more heavily on that area of the business, which would eventually come to be known as Axoni.
Charles Chang: What does Axoni do today and what do you view as the value proposition?
Greg Schvey: We ensure our clients have timely, accurate, and complete data. However, we’re more than a software provider. We work closely with the industry to align large institutions on complicated technology deployments and have built out a proven, repeatable model to get this infrastructure deployed in a wide range of markets.
Charles Chang: Is Blockchain just re-doing something we have been doing for a long time? What is the real “need” being filled that was previously impossible?
Greg Schvey: The concept of electronic data transfer has existed for a long time. The major leap with this technology is confirmation that all relevant parties are storing and processing that data correctly. Finishing that last mile of automation and synchronization has the potential to take out tens of billions of dollars of costs in capital markets, in addition to substantially reducing risk.
Charles Chang: There is some notion out there of “Blockchain for Blockchain’s sake,” that there is some fad-component. Is that mis-informed?
Greg Schvey: In many cases, that’s actually quite accurate. The space attracted huge amounts of venture capital, consulting revenue, and internal budgets. For a long time, attaching the word “Blockchain” to something was a way to increase the probability of funding. In fact, simply doing something related to the word ”Blockchain” was a major driver for many projects. With those days now behind us and the time for constant experimentation is over, solutions have to survive on their own merits. This means less total deployments, but a much higher proportion that are viable.
Charles Chang: Can you give a case study as to the critical role that’s being played and how you expect that to develop going forward?
Greg Schvey: In the case of equity swaps, the issue of broken data is a longstanding and well-known problem in the industry. To calculate a monthly payment owed on an equity swap contract, there could be thousands of underlying datapoints, all collected, stored, and processed separately by each party to the trade. Multiply that by the various swap types and number of counterparty connections throughout the market and you can quickly imagine how frequently people end up disagreeing on the value of a swap. This leads to huge operational costs, poor client service, and undesirable risk.
With our Blockchain infrastructure, any data that goes onto the shared ledger is immediately and provably synchronized with all relevant parties, eliminating breaks and substantially reducing operational costs and risk.
Charles Chang: Why is this driving value for these firms? Why are they willing to turn to it now and is this a “temporary” fix or long-term?
Greg Schvey: This is arguably the first truly fundamental fix in a very long time. The idea of being able to rely fully on all data on the ledger brings a level of efficiency that has never existed before.
Charles Chang: How do they view the ecosystem? Are these going to be core-competencies at the institutional level (i.e., will mega-firms internalize these capabilities) or will this develop into a separate sector of the industry?
Greg Schvey: Every major financial institution needs to have sufficient expertise to understand the systems they’re using, particularly from a security and risk management perspective. That said, understanding every intricacy of how the system works isn’t required from a usability perspective more generally.
Charles Chang: What is the next generation of applications or usage cases that you find most interesting?
Greg Schvey: We really haven’t seen traditional securities move to Blockchain infrastructure yet in any meaningful way, despite the many attempts. This would be a great step forward for the industry.
Charles Chang: Are there people working in those spaces now? If not, what are the key milestones we need to hit in order for these to become a reality?
Greg Schvey: There are many people who have tried this. One of the big milestones would be obtaining regulatory clarity about the recognition of a security in a distributed, digital environment.
Charles Chang: Going farther out, if we looked at this in terms of 5- or 10-years from now, how might you expect “finance proper” to be different from what we are seeing today?
Greg Schvey: People far overestimate the automation in finance today. There is still a huge amount of manual work being done for repetitive, unnecessary processes. That will look very different over the next decade. As that lowers the cost of doing business, I expect we’ll see more challengers to traditional financial models that historically have required monstrous balance sheets to facilitate.
Charles Chang: In terms of the social good, how is this future better than where we are today? Other than growing a new sector in the finance that provide some jobs and opportunities to make money, how are every-day investors going to benefit?
Greg Schvey: The first thing I’d point to about social good is the transparency and auditability this technology brings to financial markets. Much of what financial institutions and regulatory agencies spend time on is trying to understand the impact of various risks. With full transparency, identifying and solving for that systemic risk is much easier.
Charles Chang: Can you speak to the development of Blockchain-in-finance in China? How would you describe the “state” of the industry in China?
Greg Schvey: I’ve been impressed with the amount of resources and other support the government itself has put behind the technology. It’s a network-based tech, so anything that can drive a large scale network quickly will be critical. In the U.S., it’s generally left to the market to make that determination over time.
I have to imagine China will be the first global power with a government-backed digital currency. There will be benefits in terms of efficiency, as well as risks regarding access and authority, but the opportunity to set a precedent for the world cannot be overlooked.
 Author’s note: The Depository Trust & Clearing Corporation (DTCC) now uses Axoni’s Blockchain to manage its 10 trillion US dollar nominal-value derivatives inventory as does the Options Clearing Corporation (OCC) and its 72 billion US dollars in equities-on-loan.