Digital forex, GDPR and US structured products

The week on Risk.net, April 20–26, 2019

7 days montage 260419

Life’s a breach: banks settle uncomfortably into GDPR

A year into the exacting data privacy regulation, the ramifications are becoming more tangible

Digital forex settlement volume tipped to rise tenfold

DLT platform aims to settle $100 billion of currency trades by year-end

Meet Simon, Luma and Halo (they trade structured products)

Shiny new platforms want to introduce structured products to an unsuspecting US public

 

COMMENTARY: Blockchain, forex and the surviving sheep

Technological progress has a way of sneaking up on one from unexpected directions. In the 1920s and ’30s many distinguished engineers, following leads taken from HG Wells and his imitators, spent more time than they would like to admit in the pursuit of a death ray. The UK Air Ministry even offered a £1,000 bounty ($90,000 today) to anyone who could zap a sheep from 100 yards (91m) away with fatal effect.

Nervous readers be reassured: no sheep were harmed as a result of this offer.

However, in the process of proving that such a machine was impractical, Air Ministry scientists such as Robert Watson-Watt began their experiments with radar, a technology ultimately far more useful in both military and civilian terms than yet another method of killing at a distance.

Something similar seems to be happening with distributed ledger technology. Using it as the basis for a new currency has not been a success. The volatility of blockchain-based assets such as bitcoin has undermined their usefulness as a store of value. Governments and international bodies are nervous about their potential for money-laundering and tax evasion. Regulators are unsure how to categorise them for oversight purposes. Many other potential uses for DLT – such as commodity and energy trading – have also failed to take off.

But this week, Risk.net looked at one area where real progress seems to be happening – forex settlement. Nex Group and Baton Systems rolled out a DLT forex settlement service in 2018, promising to cut settlement time from 48 hours to a few minutes. Volumes are already at $10 billion a day, and Baton is confident of reaching $100 billion a day by the end of the year, as more currencies are added. The company is also looking at digitising equity swap settlement in the same way.

One hundred yards of volume isn’t much by the multi-trillion-dollar standards of daily global forex, but if the promises of capital savings and fast execution can be borne out at larger scale, and at this ambitious growth rate, then at least one of blockchain’s promises will have come true. And if the science fiction dream of a decentralised digital currency may never be much more than that, the reality is starting to seem very promising.

 

STAT OF THE WEEK

Assets under custody and administration (Auca) at the three largest US custody banks returned to growth in the first quarter of 2019, reversing the aggregate decline seen in the previous quarter. Total Auca stood at $91.9 trillion at end-March, up 4.5% quarter-on-quarter and 1.2% year-on-year.

 

QUOTE OF THE WEEK

“Most will say without high-quality accounting data, one can’t build a good quant model. Our approach is the opposite. Because we can spot the most aggressive violators of accounting principles, we have an enormous edge over those who don’t know how to process the data” – Jason Hsu, Rayliant

 

 

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