TMC Conference 2016 Keynote address: New technologies - the costs and benefits

In the wake of the worst recession on record, financial academics are thinking differently about the market and so too are the finance industry and its regulators.

The address was presented by Professor Kirilenko. In addition to his long-standing academic career, he also served as chief economist of the U.S. Commodity Futures Trading Commission (CFTC) and has been awarded the CFTC Chairman's Award for Excellence.

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Speaker

Andrei Kirilenko, Director of the Centre for Global Finance and Technology, Imperial College Business School

Since the global financial crisis of 2008 there has been some serious soul searching within the world of financial academia because barely anyone sounded the alarm. There was an enormous looming crisis but how many academics came out and said this was about to happen? About two. In the wake of the worst recession on record, academics are thinking differently about the market and so too are the finance industry and its regulators.

Policy makers have flooded financial markets with liquidity so institutions could survive and have brought interest rates down to zero or even negative levels in some cases. It has helped the industry to survive but now everyone is trying to figure out how to make money in a market increasingly beset with evermore costly regulation.

Financial chief executives considering what to do are increasingly looking to cut costs and increase efficiencies through further technological innovation. It is necessary in an industry where costs can remain stubbornly constant. A recent study shows that the cost of creating and maintaining one dollar of an intermediated financial asset over 130 years is consistently about two cents. We know the financial services sector is a consummate user of various types of computer and telecommunications technology and we know the sector attracts high calibre people - so why is this cost not coming down? Perhaps because the public is getting more benefits per unit cost from the financial services industry than before, but neither the public nor the academics think so.

For profitability to improve there needs to be a fundamental change within technology and automation within financial services. A paradigm shift akin to the evolution of the scanner which allowed visual images of documents to be shared costlessly across a network. And it is coming – crypotechnologies is a major IT innovation and catalyst for change and the finance industry has taken note.

Crypotechnologies – or distributed consensus ledgers known as 'blockchains' - can improve the efficiency of the whole system and processes around transactions while reducing costs. It is easy to use, very open and there are no licences or entry barriers. A number of very large industry players have entered into this space and there are a host of research and development consortia, accelerators, and venture capitalists looking to invest in a development which is at the intersection of technology, communications and the financial services.

However, it won’t be plain sailing. Distributed technology is horizontal and open but the problem is that most financial services firms are organised into vertical silos. Introducing cryptotechnologies across the board would involve convincing various people up and down the various divisions that they have to adopt this new technology in a potentially arduous task.

But this is where the opportunity for start-ups arises as such ventures can decide to focus on just one slice of a financial services business. For example, a start-up could manage only certain types of payments or focus on the storage and protection of customers’ digital identities. There is a growing view that banks, which have invested very heavily into security, could increasingly seek to leverage those capabilities and store peoples’ identities for use in authorised transactions.

Regulators are taking notice of this emerging distributed ledger technology with the US Securities and Exchange Commission considering whether to regulate it under rules that already exist for 'Transfer Agents'. Even though Blockchain technology is nothing like a transfer agent – which charges a fee for money or assets changing hands - this is where the US regulatory viewpoint is at present.

From a legal perspective it is a very interesting time to start considering how these digital ledgers are going to be regulated, particularly as people are quite enamoured with the idea that the pendulum has shifted in the direction of cryptography. The view is that if computer science can do a better job than humans, who have to be incentivised every step of the way, then why not use it.