The entirety of financial services will become a software business now that the tools to make it happen have been located, states Adam Ludwin, CEO,

Chain is a technology company based in Silicon Valley, which partners with businesses like Visa and Nasdaq to provide blockchain networks.

During a recent conversation at Consensus 2016, Ludwin told IBTimes UK: "The thing to realise is that when it comes to this area of technology, this is not financial engineering, this is software engineering.

"The disciplines required to do this are distributed systems, cryptography, operating systems, databases. This is low-level, hardcore software. I don't think you are going to see the innovations in this space, at the low level, coming from Wall Street.

"I think you are going to see the low-level innovations coming from Silicon Valley and you will see the actual value capture with those technologies happening on Wall Street. That's our thesis on how this is going to play out and that's why we are investing so much in the software and technology and partnering."

This is not a surprising response from a west coast technology provider. It's also not surprising to hear Wall Street voice its objections, typically things like T+ "something" is required to allow markets to function properly, or that blockchain designs will always result in critical information leakage to a sophisticated investor community. There are also some people working within blockchain projects at banks who doubt that fintech startups could solve some of the most complex issues – batched netting of complex securities settlement, for instance – without the help of academia.

"I think that's wrong," said Ludwin. "The existing banking systems are less complex than what Facebook is running, than what Google is running and what Tesla is running. Banks are very complex systems, but to say that they are unfathomably large is not the case.

"Now that's not to say academics don't have a role to play, in fact we collaborate very closely with academia. But academia is not the domain of developing concrete solutions to problems and bringing them to market. It is companies like ours that take innovations from academia, understand them, marry them with really great software engineering and then be able to bring those to market. That's really the domain of entrepreneurial technology."

So blockchain has the power to refresh the parts of the financial system other technologies cannot reach; no quarter of the system will be left unbooted.

"Not in the long run. In the long run, financial services, the whole stack becomes an instant interoperable software layer. It's ridiculous to think about how financial services works today. Look at the phone system; look at the shift from telephones to voice over IP; from mail to email. It's going to follow the same trajectory. We needed the low level cryptographic data model to make it work and now we have that."

Winners and losers

Another chestnut worth roasting is the question of which jobs will be replace as software eats financial services – brokers, custodians, traditional infrastructure and clearing services providers.

Ludwin said: "The reality with any disruptive technology is that there will be winners and losers. There are some obvious candidates for disintermediation. But what we are finding as a technology company that partners, that it's not always obvious who is going to win.

"It's really up for grabs today. This is because everyone can kind of do everything that everyone else does with this new technology. What I mean by that is, people that were historically custodians can now get into the trading business and exchange business; people that were historically trading or exchange-orientated can get into the custody business. People that couldn't really function like a bank could start to function like a bank and do things that are bank-like.

"Leaving the regulation aside, the technology and the kind of business logic is up for grabs. Blockchain is like hitting the reset button on financial services, for better or for worse. It's changing financial services into a software business.

"That's a big deal. It means, the people most likely to capitalise and win with the technology are actually leadership teams at financial services companies. Those that get an understanding of the technology and figure out how to capitalise and do something strategic with it.


Returning to the question of privacy - a sine qua non for banks courting this technology - the Chain Open Standard uses three techniques: one-time-use addresses, zero knowledge proofs and encrypted metadata.

A one-time-use address is created each time an account holder wishes to receive assets. These differing addresses prevent other observers of the blockchain from associating transactions with each other or with a particular party.

To conceal the contents of a transaction, zero knowledge proofs cryptographically conceal the assets and amounts in a transaction, while allowing the entire network to validate the integrity of the contents. Only the counter-parties (and those granted access) can view the details of the transaction. In addition, transaction metadata can be encrypted with traditional PKI (Public Key Infrastructures).

Asked which privacy solution is the most applicable in the future, Ludwin said: "I think zero knowledge proofs holds a lot of promise. But I don't want to say more than that because we are going to be making some announcements later.

Regarding the R3 approach on its Corda platform, Ludwin said: "That solution was don't have a shared infrastructure. I get why they landed there because it turns out it's incredibly hard to get both distribution and privacy, and to get the consensus - to get all the things you need in one system.

"Again it comes back to really serious software engineering to make that happen. That's the advantage of being in the valley; we can say, look, we are going to take a longer term approach; we are going to focus on optimising the technology level and our partners are in for the long haul with us.

"As well as bringing the Chain Open Standard to more financial partners, another dimension is bringing it into academic communities and consortia, like R3 or Linux or others interested in studying these concepts.

"We will certainly do that. What we won't do is wait around for a committee to come up with an answer, which seems like what everyone is doing at the moment. We are going to put our heads down with our partners and iterate."