Andrew Neil was talking to Charles Cascarilla, the chief executive officer of Paxos, about the rise of blockchain technology
Say you’re at a dinner, and someone who doesn’t work in fintech asks, “What is blockchain?” How would you answer that?
It's a database — plain and simple. It's easy to get caught up in hype, but it was a huge innovation in databasing technology because it's fully distributed. With a typical database, there needs to be someone running it. What’s different with the blockchain is that nobody's running it because everybody's running it. Usually, you have to pay someone to run a database for you, but with blockchain that responsibility has been completely decentralised.
What would you say is the biggest misconception about blockchain?
All blockchains are public. There are private blockchains that can have pre-determined levels of transparency and permissioning that can accommodate a wider swathe of industries to utilize the technology. Public blockchains allow all parties to view transactions and anyone (at any level) can participate in the consensus process. There is obvious value in this, but it can create problems for organizations with immensely complex business operations and high security needs. Large institutions are enthusiastic about the technology, but privacy, security and the integrity of transacting are still very important to them.
Within financial services, what are the structural and cultural obstacles that blockchain proponents have to clear before mass adoption?
The big impediment for financial services is the massive infrastructure built on manual processes and systems programmed in the 1970s and 1980s that have not evolved. Tech debt, lack of innovation, new regulation and fear of being replaced have all played their part to stall mass adoption.
Paxos is using blockchain to streamline settlement of physical commodities. How does this work?
Our client passes gross trading data for whatever physical commodity they trade. This data flows straight to Paxos and the entire settlement process is handled by our technology, eliminating risk. There are no manual confirmations that may result in errors, counterparties are matched, and the trade details are confirmed to be accurate (or not). The physical balance is transferred at the exact same time as the cash, and if there is a shortfall of either, nothing moves. This simultaneous delivery and payment dramatically decreases settlement counterparty risk and cost. This increases liquidity and unlocks opportunity.
Euroclear decided to step out of the project last year – how much of a setback was this?
We don’t look at it as a setback at all. It was a great learning experience for our team. In fact, this underscored how we can leverage our strengths of speed, agility and iteration to develop the best product for our customers. We are very excited for the coming launch.
Until recently Jason Nabi had been head of EMEA for Paxos. Who will replace him? Have there been other personnel changes?
Our Precious Metals team is based out of London, and Seth Phillips (Executive Director, Bankchain Precious Metals) has relocated to lead the team there. He is overseeing all business development conversations and product discovery.
Is bitcoin a (bursting) bubble?
No, in the sense that bitcoin is a generic term for crypto assets- they are definitely here to stay. Bitcoin being the ultimate winner is certainly up for debate as is becoming a day to day currency for transactions, but the momentum is firmly in place. The price will continue to fluctuate, but it has proven itself as a store of value. The market has matured and the sophistication of buyers and sellers is increasing and regulation will be interesting to watch, but institutional involvement is widespread. Trading firms, asset managers, hedge funds, and even banks are accepting bitcoin and other cryptos as valuable financial instruments.
Is the real value in the underlying blockchain technology?
We have always thought the underlying blockchain technology as a means to mobilise assets and act as a distributed ownership network is the underlying innovation applicable across a wide range of problems. The Bitcoin blockchain will not be the technology that drives widespread blockchain adoption due to its public nature, the deliberate inefficiency of its database for volume of transactions, but other blockchains (both public and private) have the ability to make virtually any industry more efficient.
Will cryptocurrencies survive?
A few will, most won’t. The rush of so many bad ICOs and technologies created a glut of terrible cryptos that unsavvy investors gobbled up hoping to get rich quick. There are some intelligent cryptos outside of the two majors (Bitcoin and Ethereum) that have been developed (or are being developed) that could potentially be very valuable in the future as the market matures. The staying power of cryptos will be predicated on the education of regulators, the steps taken by those influential in the space to make sure that the foundation of the industry is secure, and the continued evolution of technologies to the meet the needs of different industries and investors.
If you had to guess, where would you think the next financial crisis is going to come from?
Financial crises are caused by a combination of economic imbalances and excess debt. The solution to the last crisis was to support the imbalances and debt with government spending and central bank money printing. Debt levels as a % of GDP are higher than before 2008 in the US and globally, and super high asset valuations in virtually all asset classes are supported by artificially low interest rate environments. A lack of faith in fiat currency, inflation and mismanagement of monetary policy on behalf of central banks has the potential to bring on another global financial crisis. The Fed might continue to raise interest rates to deal with inflation, but this runs the risk of stifling asset markets and laying the groundwork for another recession. However, if they don’t raise interest rates in the interest of keeping asset valuations high, they could bring about an inflationary crisis. This might make bitcoin and other crypto assets more appealing to the masses in the sense that they aren’t controlled by a centralised government authority that continues to make their money worth less and less. It is a real dilemma we are facing, and it will be fascinating to see what happens.