Paul Walsh: Where does FinTech stand in the industry right now?
Peter Randall: From a UK perspective FinTech is an essential part of the future. As I understand it, financial services is the UK’s biggest export and innovation in financial services is essential if that export sector is to be maintained and prosper.
This is particularly true in a post-Brexit world where there are other challenges ahead and the ability of technology processes to improve customer experience, reduce costs and change risk profiles is an essential part of the overall equation.
FinTech is a really important segment for the largest British export market.
PW: How is it viewed from a regulatory point of view?
PR: From a regulatory perspective we were pleased that SETL has been chosen as part of the FCA’s sandbox arrangement and we are currently testing and reporting back to the FCA.
This sandbox development is very powerful from a credibility point of view as there can be no dispute about the potential of this idea.
The FCA Sandbox environment provides SETL and other firms with a safe place to test our blockchain based payments solution before we go live and receive regulatory approval.
I think the FCA is to be commended for their foresight, its sandbox initiative and its commitment to making it work.
I have been dealing with regulatory bodies for around 33 years and I have not had as much constructive conversations as I have had with the FCA around the sandbox developments as they have listened to industry concerns on the subject.
PW: What is your take on the R3 exodus?
PR: Lets think about consortia which we have seen before. There have been many examples, some of which have worked out, some of which haven’t.
I remember the Global Straight Through Processing Association a big consortium that eventually did not work because participants could not align the right business person with the right process.
In my direct experience, multi-bank consortia rarely deliver what they set out to deliver.
PW: How do you view the recent ESMA report which states that DLT may render some regulations less relevant?
PR: The whole point about financial market infrastructure regulation is that it is as frequently opined about by more people who know nothing about it than anything else in finance.
Ultimately regulators don’t regulate systems, that is the fundamental mistake that a lot of commentators make. Regulators regulate people who use systems, a regulator doesn’t – for example – say: you can’t use Microsoft Word or Excel, that is not their job.
The regulators’ job is to look at the output of participants in the system and then have opinions about whether it is legal honest and fair. There are some systems that are regulated, SWIFT for example.
So is it appropriate before a DLT system is used in a widespread way to regulate it? At the beginning there is nothing to regulate. The more interesting point is how does the regulator maintain their distance from the incumbents who would like to make sure that changing technology does not disintermediate them.PW: How important is the topic of industry cultures in the implementation of FinTech?
PR: There is an inherent tension between FinTech innovations and financial markets implementation. They tend to sit under different business lines within organisations.
The point about implementation is that I have never met anybody who works in innovation, at any financial institution, who has had a budget to work with.
The people with budgets are the businesses heads. When you talk to the businesses, they are going to ask simple questions: ‘How is this going to grow my business? How is this going to shrink my cost base? Have you done this before and who is on your board?‘
When asked these questions they would say ‘this is going to allow you to do things currently done by other people, e.g. expanding the lines of business that you currently cover’.
This collaboration is critical.
PW: How does this specifically apply to the custody space?
PR: Around five years ago the big support for T+2 and T2S was coming from a couple of ICSDs and they were sitting around the table looking at all the other CSDs and realised that T+2 and T2S would allow them to immobilise sets on all their competitors platforms and become the dominant player.
Unfortunately they made a critical mistake, they only looked at everyone else who was a CSD. The people outside of this, the global custodians, now look at it and think that ‘we have direct access to T+2 and T2S, why can’t we do the same to those custodians as those custodians want to do to each other?’.
Therefore there is now an enormous groundswell of opinion for a group of custodians to disintermediate those services that they no longer require to be provided by a specialist provider as they can do it themselves.
They can do it themselves because they have access to central bank money through T+2 and access to settlement finality through T2S.
From a custody point of view the opportunity to establish a new CSD using T+2 and T2S is crucial
PW: What can you see happening in 2017?
PR: By the end of 2017, blockchain firms will be heavily engaged with a plethora of implementation projects as the industry will recognise that speed, capacity identity/privacy needs to be widely adopted as the de facto implementation standard.