Have FTX and ASX killed the promise of Blockchain?

R3 Dec 15 2022 By: Richard Gendal Brown
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Have FTX And ASX Killed The Promise Of Blockchain?
Richard Gendal Brown
Richard Gendal Brown Chief Technology Officer, R3
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You would be forgiven for thinking that blockchain is dead — or dying — given the grim news for crypto adherents following the FTX implosion. And the failure of a project to modernize the Australian Securities Exchange has severely damaged the ‘enterprise blockchain’ brand. There is, no doubt, more bad news on the horizon.

Yet, amid the problems, but away from the limelight, other projects are succeeding brilliantly.

What is going on? How can 2022’s business outcomes be so divergent?

What can explain such divergent outcomes across both public and private blockchain projects in 2022?
What can explain such divergent outcomes across both public and private blockchain projects in 2022? (Image by GETTY)

First, the successes:

UBS issued the world’s first totally digital bond last month. It exists only in a ‘digital’ CSD – at SDX, the Swiss Digital Exchange – and its issuance was over-subscribed.

Two blockchain platforms in Europe, HQLAx and Fnality, running on entirely different technology stacks, have now successfully interoperated with each other.

And a DLT-based startup called ‘Grow’ that is disrupting the Australian ‘super-annuation’ market, has just gone live with one of the world’s largest fund managers, Vanguard.

And these events occurred in just the last few weeks.

What I think these projects have in common is that these firms and projects exist to solve real-world business challenges, and it just so happens that they decided the best way to do so was by building on blockchain-style architectures. A common thread is that they are focused on improving the operation of entire markets, and doing so by modernising how the participants in those markets interact and transact with each other. (Disclosure: some but by no means all of the projects discussed in this article use my firm’s products.)

Business vision and technology architecture are aligned, in other words. Boring but important.

And it’s worth observing that there have also been shining successes in the public crypto markets. Yes, really.

Away from the FTX, Celsius and BlockFi disasters, it’s worth noting that the truly decentralised permissionless crypto protocols – such as Aave, Compound and Uniswap – worked just fine. Yes – DeFi protocols have suffered hacks in the past – but in the most testing of circumstances this year they performed admirably.

In the case of these protocols, a fully decentralised business model was implemented on a fully permissionless architecture. Business and technology aligned in that sphere too.

There's a grim irony that the divergence of outcomes in 2022 for public blockchain projects was due in no small part to the tendency of some prominent personalities to speak with forked tongues.
There’s a grim irony that the divergence of outcomes in 2022 for public blockchain projects was due in no small part to the tendency of some prominent personalities to speak with forked tongues… (Image by GETTY)

This is why it’s so important to remember that it was the ‘faux crypto’ firms such as FTX that unleashed the chaos. These firms walked one walk, pretending to be adherents of the anarchic, ‘code is law’, decentralised crypto philosophy, whilst, in reality, were financial institutions in disguise, completely unregulated.

It feels like FTX used crypto language to obscure its real business, and too many people were taken in and harmed as a result.

But observe how the act of providing crypto financial services is not itself problematic: the banks offering crypto custody, and well-regulated exchanges such as Coinbase, also seem to have performed just fine.

We are, in effect, seeing real-life proof that if you walk down the middle of the road you get run over.

The DeFi protocols show us you can succeed on your own permissionless terms. And the well-managed exchanges show us you can succeed as regulated financial institutions. But those that tried to look both ways, acting as banks whilst evading any associated regulation, blew up, taking their customers’ money with them.

But what about the failures in the enterprise blockchain space?

Here, we have the benefit of an in-depth report into the failure of the ASX’s ‘CHESS replacement’ project. To its immense credit, ASX published, in full, Accenture’s analysis of what went wrong.

There is much to learn for all of us in the enterprise blockchain space. Yes, it’s clear that there were software issues, but that’s perhaps to be expected of a new technology. But it’s also clear that stakeholder engagement and failures of governance were the root cause. Reading between the lines, it appears that the project started out intending to transform the Australian equities market, and chose an architecture to match. But it ended up with a less ambitious, more centralised vision, yet didn’t change its technical direction when that became apparent.

Business and technology diverged significantly, and failure was the inevitable result.

Perhaps we could say that this project also found itself walking down the middle of the road – in this case reimplementing a traditional business model but with transformational technology – and also eventually got run over.

So what can we learn from the most tumultuous year – yet – in blockchain?

First, you cannot fool nature. Hope and hype (and alleged outright fraud in the FTX case) can get you a long way, but the brutal reality of engineering, accounting and economics will prevail in the end. So, whether you’re in public crypto or enterprise blockchain, challenge yourself – hard – about the business you’re in and the problem you’re solving. Are you building a legitimately useful product? And does your business model align to your technology architecture? Yes or no?

Secondly, if you’re working on a project that hasn’t yet launched, don’t lose hope! These things take time, effort and dedication. The success of the projects listed above- and more – show that the right vision matched with relentless execution can succeed, even in the hardest of circumstances. As the CEO of Goldman Sachs observed this week, “Blockchain is much more than crypto, and regulated financial institutions are well positioned to harness the revolutionary technology”

Finally, if the middle of the road is the wrong place to be, how do you cross it? This is of particular interest to those seeking to bridge between the worlds of regulated finance and the new decentralised ecosystems. I believe the clear answer is interoperability. Keep the DeFi assets on their home networks. Operate the financial institutions as diligently regulated entities. And link the two worlds using well-defined, well-tested technical protocols.

If I’m right, it’s possible the most important blockchain news of 2022 for business was the announcement that everybody missed: the world’s first live interoperability demonstration between two production-level enterprise DLT platforms!

Richard Gendal Brown
Richard Gendal Brown Richard Gendal Brown is the Chief Technology Officer at R3. Richard led the teams that built and brought to market Corda (Distributed Ledger Technology) and Conclave (Confidential Computing).

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