As a former JP Morgan banker, Blythe Masters is familiar with risk – she was among the founders of credit default swaps, the complex form of financial insurance that played a role in the 2008 crisis. With a lengthy career in investment banking behind her, she has since moved on to set up Digital Asset Holdings, a financial-technology startup firm focusing on the technology behind financial trades and virtual money that counts Deutsche Börse among its investors.
In an interview, she told Handelsblatt about the appeal of blockchain, a technology that creates a ledger of financial transactions. While blockchain has formed the basis of bitcoin, the controversial Internet-based currency, Ms. Masters argued it has many broader, positive uses that have led regulators to take a second look at the technology. She also explains why her company should be viewed as an ally – not a threat – to traditional banks.
You used to work as an investment banker for JP Morgan. Do you ever regret leaving that world behind?
If I hadn't been working there for such a long time, I wouldn't be able to do what I do today. I am building a business to address the challenges that I am familiar with because I came from that world. Banks are under pressure regarding their return on equity, but also from a technology resiliency point of view. The blockchain can help to tackle these challenges. And of course it is fun to work at a start-up and be part of something innovative and new. But you need customers and relationships in order to make it work.
What are the advantages of blockchain?
By sharing and replicating information, blockchain allows for real-time information, reduces errors or fails, and tremendously reduces the costs of building a shared infrastructure. Blockchain has the potential to drastically improve post-trade efficiency and security, while reducing cost, latency, risk, and capital requirements for financial institutions.
Are you a competitor to existing financial institutions?
15 major global financial service providers took part in our latest financing round, including banks, exchanges and technology companies. If we were a competitor to any of them, they would not be supporting our business case. They see us as a partner. We are just a software developer. We develop technologies that we will sell to our customers, enabling them to serve their customers quicker and more efficiently.
That sounds good in theory. But does it work in practice?
I am convinced that it does, but it will take some time. We are currently working on a commercial distributed ledger solution for the post-trade of the Australian ASX. We are not talking about hypothetical proofs of concept. These are real-world projects.
So the blockchain could be applied just for post-trade?
I would not say “just post-trade” – we are talking about a gigantic space that costs banks tens of billions of dollars a year. There has been an arms race in the execution of trades. The trade happens in milliseconds, but the completion of transactions in post-trade takes hours or even days. The blockchain offers an enormous opportunity to change that…
… if regulators allow this to happen. Their initial look at the blockchain was very skeptical.
Regulators were apprehensive at first when it came to using blockchain for virtual currencies. And they were absolutely right: Any payment system that allows anonymous transactions is a potential danger, for example, money-laundering. But the debate has shifted. Today, there is more hope than fear.
There are a lot of benefits. Blockchain records every transaction in a decentralized database. No transaction can be unilaterally manipulated. You have an immutable record of every transaction. You can get a direct picture of what every ultimate beneficial owner is doing. The blockchain provides a level of transparency to regulators that is actually a dream.