As we’ve discussed before, the M&A market for market data providers is expected to continue to heat up well into 2022. Recent evidence includes Options Technology going and nabbing Activ Financial. It’s not as big a deal as a Big Tech company acquiring a major market data provider, but it’s certainly a sign of what’s to come.

Anyway, I’m here to talk about blockchain today.

Hear, ye! Hear, ye! DLT Skeptics!

Deutsche Börse (DB) recently chose Digital Asset to build out digital securities capabilities for the exchange’s cloud-based D7 post-trade platform. Digital Asset, you may remember, is the company that famously burst onto the scene in 2015 with Blythe Masters as CEO. (She since resigned in December 2018.) It is also the creator of Daml, the smart contract programming language, and the builder of the Australian Securities Exchange’s (ASX) new settlement system, dubbed Chess. And it has contracts with the Singapore Exchange (SGX), the Hong Kong Exchanges and Clearing (HKEx), Bursa Malaysia, and Nasdaq, among other financial institutions.

Even if you’re a blockchain and distributed-ledger technology (DLT) skeptic, Digital Asset is a serious player when it comes to live capital markets implementations and projects.

Shaul Kfir is a co-founder of Digital Asset and its chief architect. He assumed the position earlier this year after serving as the vendor’s CTO since its inception in 2014. Some number of years before that, he was a major in the Israeli Defense Forces. If serving in the military has taught him anything, it’s that you must have, what he calls, an adversarial mindset.

“My life was on the line quite a few times in hairy situations depending on technology, so there’s an appreciation for critical systems and doing drills for everything you need to drill—you can’t wait for the day of,” he said. “Here, we’re talking about capital markets players opening up their networks more than they’re used to doing. We all see now with everything in the cybersecurity space, it’s a risky thing and if you’re building the technology, you need to have a very, very strong adversarial mindset of, ‘everything that can go wrong, will go wrong.’”

I wanted to speak with Kfir because I’m a blockchain skeptic—actually, who gives a shit if I question this new type of technology? I know several respected industry executives who have expressed skepticism about DLT. (Examples here, here, and here.) When we’ve written about Digital Asset of late, it’s usually due to delays with the ASX rollout, or how market participants Down Under are worried about proposed amendments by the exchange for its reporting model for the new platform.

However, that’s not a totally fair portrayal. The startup is much more than just the partner building Chess. So I posed some questions to Kfir to better understand Digital Asset’s strategy and see why he believes DLT is the way of the future, as opposed to, say, app interoperability tools or architectures built around open APIs. Hopefully, this helps to contextualize why DLT believers are so passionate about this topic.

First, the Deutsche Börse press release read like it came from a company that believes in the idea of Daml and digital securities, but the boundary ended there. The impression I got was that this pairing was about creating a centralized database and using Daml so the exchange can have the ability to issue, settle, and service smart contracts. As it pertains to DLT and wider settlement needs, it looks as if DB is interested in having the ability to future-proof the organization so that it could potentially figure out other ways to utilize the technology, but that’s not the core of this project.

Kfir didn’t want to speak for the exchange’s overall thinking, but he said that Digital Asset’s vision is “very similar to the public blockchain vision that you hear, even though I cringe sometimes when I hear the hype there.” From his understanding, though, the exchange believes that there’s going to be a global economic network where “value”—or trading and commerce—moves digitally just like information moves on the internet.

“Anyone who is running a Daml product, those actually connect into a global mesh network, or a network of networks. Now, many of them don’t actually choose to do that connection on Day One, and that’s very understandable because of how business works today in all of those markets,” he said. “You can think of what they are taking, though, even when running centralized, as nodes in a distributed system, but they just choose to ring-fence that right now and not actually connect that into other nodes for things outside of this single application that they’re deploying right now.”

Fair enough. But it also sounds to me like Digital Asset is more centered around Daml, and less around building pure DLT/blockchain networks. I tell Kfir that the way I see it, Daml is akin to how FDC3 is used by the likes of OpenFin and Cosaic to build their app interoperability environments/browsers/containers/whatever. It’s not about creating the pristine DLTs of Bitcoin and Ethereum fame, but more about the programming language that creates smart contracts for finance. OR…maybe I have it confused—maybe Daml is the DLT and I’m not connecting the dots properly. So which is it?

“It’s a little of both,” he said, to which I exclaimed, “And that’s why it’s difficult to understand the space!” He laughed and acknowledged the point.

He contends that any company using the Daml network—think, trading firms connected to the likes of ASX, HKEx, SGX, Nasdaq, and DB—can create workflows that can connect across markets and have it feel like a local connection, similar to the way your browser “points” to the internet and connects you to the site (application) you want. Or, more specifically, you write on a single platform, even though its connected to multiple networks.

“That’s really important because one of the things that people want to get out of any technology today is the speed-to-market for something new. With a lot of the previous integration approaches, if there’s a market with 100 different financial companies on that market and you want to change a standard, everyone needs to go and implement that change in the standard,” Kfir said. “The promise of things like a blockchain abstraction, of smart contracts, is that if I want to upgrade some workflow, one person needs to implement the changes of schemas and semantics of that workflow, and then everyone can choose to adopt it at their own pace, but the implementation is once.”

Again, though, doesn’t this sound an awful lot like the promise of app interoperability? Or of open APIs, which are becoming the darling of financial institutions like Goldman Sachs, State Street, and BlackRock?

“I think the hype around cryptocurrency has just accelerated something that would’ve happened anyway, it just would’ve happened slower, potentially,” Kfir said. “If you look into the database world, we were already starting to go into things like globally scaled databases within one company, and you saw work on federating multiple databases run by a few different companies. We were already seeing that movement toward integrating, but not just integrating through these message integrations, but integrating more deeply where we agree on the data model and on the semantics of how a business workflow happens—that trend was already starting.”

For example, a smart contract is essentially broken down into three parts. It has a shared data schema across multiple companies. Similarly, it has shared semantics around that data schema. And, finally, it has trustless execution and distributed governance.

“Those first two—we agree on what the data structure is and we agree on exactly how that is going to change—that’s much more powerful than the way integrations are done today, which is, we’re going to agree on some messaging format, but each of us needs to apply that change locally in our own systems,” he said. “I think it’s just inherently a more powerful, faster way of doing things, and there’s less room for confusion and reconciliation. We know we’re seeing the exact same thing and interpreting it in the exact same way. I feel it’s kind of inevitable that things should move in this direction, even if it came through the back door of how the technology came about.”

Kfir said it’s “very hard” to explain a vision for a new platform—if a market is established and running fine, why fix something that isn’t necessarily broken?

But the markets—equities, fixed income, foreign exchange, and so on—face a fundamental dilemma: The pace of innovation is moving faster every day, and the amount of data available is rapidly expanding. If you’re getting bogged down in integration projects or overhauling legacy systems so that you can bring in more data and analyze it, you simply can’t build new products and services as quickly as you might like.

In the Asia-Pacific region, for example, there’s no way to coordinate a transaction across, say, the ASX and HKEx. If a firm wants to borrow in one market against collateral in another market, there’s no way to do that, even if the market participants created that workflow and are connected to both markets.

“ASX says how I’m allowed to use ASX equities; Hong Kong says how I’m allowed to use Hong Kong derivatives. But now as the user, as long as I’m in the confines of those two [markets], I can now create a transaction across those two and create a loan that has less risk because I’m collateralizing that loan with another market,” Kfir explained. “There’s always risk in upgrading to a new type of system—a new type of technology—but the limitations of the current system are really keeping us back in terms of what we can do. That’s where I think people should get interested and excited.”

Now—dear reader!—I must confess something: I have no fucking clue as to the validity around the lessening of risk or even the desire/need for this type of transaction. BUT, I think the key takeaway here is that there are so many DLT evangelists because the promise is that in a perfect world, firms will be able to innovate faster than they can today.

It must be said, though, that it is not a perfect world. And the ASX’s DLT replacement project has been anything but rapid. As noted before, Kfir’s military background trained him to prepare for the unexpected and for when things go wrong.

“I’ve learned a lot, and I was naïve about how capital markets work from a political and rollout point of view, coming from a technology background. The first time of deploying this is hard—it’s a rollout where there’s a lot of herding of cats in Australia. I won’t speak for the ASX, but I do believe even there, there was a hope that things would move faster in terms of engagement with regulators and market participants. It’s an ambitious thing because they haven’t only changed the technology, but they are also changing the actual system and the logic of how clearing and settlement work in Australia.”

But once in place, the market will be able to innovate faster than it has been able to in the past, and once connected to other markets, products never seen before can have the ability to come to life.

In the beginning I laid out how Digital Asset has a lot of projects underway at a lot of exchanges. Maybe I’m overblowing this, even with all that, I think there’s a lot riding on the ASX rollout—and not just for the exchange and the vendor, but for the entirety of the blockchain solar system. DLT certainly has been used to improve various workflows around the industry, but a major exchange settlement system (and connecting that to other markets in APac) would be a very large feather in the cap…or a heavy albatross if there are additional delays and issues.

While I remain a skeptic, Kfir did help move the needle for me toward the direction of promise. Agree with Kfir? Disagree with me? Let me know: anthony.malakian@infopro-digital.com.