Frédéric Dalibard, Head of Digital at Corporate & Investment Banking at Natixis, chairs the board of consortium R3, a start-up set up by a group of financial institutions and tasked with looking into uses for blockchain technology. It raised funds of $122 million dollars in 2017. He tells us about the strong interest in this technology and its uses in the banking sector.
What impact does blockchain have in the banking sector?
Blockchain is attracting a lot of interest from banks and financial companies as they have realized over recent years that it is a way to trade financial assets more efficiently. We are beginning to see the various advantages of this technology, whether in trade finance, structured finance, asset management, payment or insurance. It improves process efficiency for complex transactions that involve several stakeholders and require a number of interactions and the synchronization of operations. It also insures increased security of exchanges and cuts back transaction costs by eliminating the need for costly centralized trusted third parties. So enhanced traceability and operating gains provided by blockchain technology therefore reduce risks.
What do you think about banks that develop their own cryptocurrencies?
Some banks are looking into the vast array of options that lie between cryptographic asset and digitalized central bank currency, such as JP Morgan, which recently decided to issue its own token on the blockchain. This token is a sort of debt security on JP Morgan issued on a blockchain. In practical terms, this means that the bank certifies that the digital tokens (JPM coin) that it issues on this blockchain are redeemable for dollars and that it is possible to use them to conduct transactions. This system works so long as everyone trusts the issuer and if the tokens issued are accepted everywhere. However, it is important to bear in mind the limitations of this approach as cryptocurrencies issued by banks carry intrinsic credit risk and therefore will not be accepted by all parties.
Why are bank cryptocurrencies not yet widespread?
Let me give you an example. If Natixis were to launch its own coin, it would only have the value that our counterparties decide to give it. For example, would an American bank that accepted payment in Natixis coins be able to use them to meet its own payment obligations to a UK bank? That would depend on the UK bank’s opinion of Natixis’ creditworthiness. This raises the question of fungibility: we are still in the experimental phase for monetary solutions. For the moment the limitations of these various scenarios must be taken on board and this lack of compatibility restricts the potential uses for coins issued by banks. I believe that the future lies in market-wide projects involving a large number of counterparties and leading to a real extensive impact on use via extended acceptance of these tokens in the broader financial system, rather than individual initiatives.
What is the future for cryptocurrencies and bitcoin?
The value of traditional cryptocurrencies currently lies in the use that the various market participants wish to make of them, and this leads to massive volatility – as a banker, I would not want to take on board that kind of risk. I would rather have a stable instrument, which is as close as possible to central bank currency and does not carry intrinsic credit risk. For the moment the lack of regulation is a vital point in the future development of cryptocurrencies. My feeling is that for such times as states have little control over cryptocurrencies – particularly in tax terms – their use will remain limited. In other words, if the use of cryptocurrencies begins to increase, governments would have to get involved to ensure that these transactions do not slip through the tax net. This would root these cryptocurrencies more firmly in the real world, automatically making them less speculative.
What is Natixis' strategy on blockchain technology?
We have been looking into blockchain technology since 2015. Firstly, we asked Corporate & Investment Banking to take part in one of the largest blockchain consortia known as R3. As part of this initiative we looked into the potential benefits of this technology for our business lines and then began to apply it to concrete use cases to make our in-house processes more efficient. This involves business lines that have relatively strong market positions such as trade finance and commodity trade. For example, we are involved in projects such as Marco Polo, a supply chain finance platform for large companies; komgo®, a commodity trading platform; and we.trade, a trade finance platform for SMI/SMEs. All these blockchain projects are already in use at Natixis. Of course like any new technology rolled out in the financial markets, migration to blockchain-based systems will be gradual, to ensure that we develop long-term sustainable projects while also safeguarding business security.