As a technologist, Vipin Mahabirsingh is excited by the opportunities as well as the threats of blockchain. As the managing director of a CSD, he is cautious about rushing it into production. But it is as an engineer that he is best able to distinguish between what is hype and what will drive adoption of the new technology. What matters, he says, are network effects, communications standards, a supportive framework of law and regulation and, above all, a convergence of interests in favour of adopting the new technology not just among CSDs, but among all market participants.
It is not hard to tell that Vipin Mahabirsingh is an engineer. The managing director of the Central Depository and Settlement Company Limited (CDS) in Mauritius is immune to the nirvana fallacy that afflicts the large army of blockchain evangelists that have never written a line of code in their lives. An electronic engineer who studied micro-electronic engineering at the University of Mauritius and semi-conductor physics at Cambridge, Mahabirsingh knows that in digital technologies the best is always the enemy of the good, and that incremental improvements are more valuable that the pursuit of perfection.
“I am not going to adopt blockchain just because everyone says it is the latest thing,” he says. “I need to see empirical evidence of the benefits that a blockchain-based system will bring, because at the moment I do not really see what problem we are trying to solve that cannot be solved by existing systems.” Do not mistake this statement for the now familiar voice of the blockchain sceptic. Mahabirsingh describes his approach to business as “challenging conventional wisdom” – and blockchain appeals to him precisely because it is a challenge to the status quo.
But he is no starry-eyed idealist about blockchain. He has read widely and deeply about the technology, approaches it from first principles, and considers the threats and opportunities it presents to a central security depository (CSD) in a systematic and scientific way. More than 20 years on from the day he joined CDS as a systems manager, Mahabirsingh no longer writes code, or even runs systems in a hands-on way, but he remains an information technologist at heart. One reason he leads a CSD is that a CSD is always under pressure to deliver more for less – and Vipin Mahabirisingh, like the true engineer he is, always believes that any a process can be run better and more efficiently.
Networks effects are crucial to the value of blockchain
One truth about the ability of blockchain technologies to transform the operational performance of a CSD has not escaped him. The benefits depend on network effects. To Mahabirsingh, what should govern the readiness of one CSD to adopt blockchain technology is the readiness of other CSDs to adopt it – and not just CSDs either, but also issuers, investors, brokers, exchanges and custodian banks.
“Adoption of blockchain does not depend on one actor alone,” says Mahabirsingh. “There needs to be a convergence of interest between the different stakeholders in the securities industry in favour of the adoption of this technology. We need a co-ordinated global approach to adoption, rather than a piecemeal approach. For this technology to work there has to be global adoption and global standards, including a legal framework that can span jurisdictions.”
Standards are crucial to the realisation of network effects
This observation contains an insight more profound than its echo of SWIFT message standards suggests. Successful technologies, especially of the digital kind, are actually compounds of multiple technologies. The Internet, to take an obvious example, is not a single technology but a combination of micro-processors, servers for storing data, data processing algorithms and telecommunications. What enables them to work together is standards. In the same way, blockchain technologies cannot simply supplant legacy technologies: they must co-exist with them for years, perhaps decades. In other words, blockchain adoption depends on standards that can deliver inter-operability not just between blockchain networks, but between blockchain networks and legacy systems.
This goes some way towards answering the question: why has the ASX gone it alone in replacing its CSD platform with blockchain technology built by Digital Asset? Part of the answer is that standards mean it can. The ASX is not forcing any of the Australian market participants to switch to blockchain technology immediately. The ISO 20022 standard means that its existing users can continue to use existing technologies until they need to replace their existing systems – or the benefits of blockchain technology become unarguable.
Mahabirsingh is intrigued by that test. He can see that the ASX decision has captured the imagination of CSDs, as a first industrial-scale application of blockchain technology in the post-trade industry. “Some CSDs are even talking about `second mover advantage,’ in which they will apply lessons learned from the ASX project, and avoid certain pitfalls,” says Mahabirsingh. “But the challenge facing the ASX is to provide empirical evidence of the greater cost-effectiveness of blockchain technology for CSDs and their stakeholders within the existing Australian market structure and by comparison with existing technologies.”
Convergence of interests will drive adoption of blockchain
The ASX is clearly betting that evidence of the benefits will emerge quickly enough to encourage adoption of the technology by all parts of the domestic securities market eco-system. Some analysts go further, arguing that, as trusted third parties which all market participants are obliged to use in order to settle transactions, CSDs are the natural drivers of blockchain adoption. Mahabirsingh is not convinced that CSDs can or should accelerate adoption in this way. “I think adoption will be driven by a convergence of interests between CSDs and all market participants, including issuers and investors and regulators, and they have to be persuaded that blockchain will make things better for them,” he says.
Should such a remarkable convergence of interests emerge, its power is impossible to deny. In fact, it would drive a rapid evolution of the post-trade industry in favour of blockchain. “The key to unlocking both the opportunities and the threats of blockchain is how the market structure evolves,” says Mahabirsingh. “Much depends on how other actors see the market evolving.” This is the mind of the systems engineer at work. Systems engineers know that, paradoxically, every influence is both cause and effect. Nothing is ever influenced to move in one direction only. There are circles of causality, in which every system is subject to multiple influences, including the technology investment decisions of members of the system. It follows that the syllogism blockchain = enhanced efficiency is untrue.
Existing technologies can achieve the same benefits at lower risk
As Mahabirsingh notes, CSDs are already responding successfully to continuous pressure to cut costs and risks. “This means we are the best at what we do,” he says. “We invest in the existing technology to become progressively more cost-efficient.” Real time gross settlement (RTGS), for example, is possible with existing systems. The reason RTGS is not more prevalent is that CSDs prefer net settlement because – considered systematically – it is less risky. RTGS would create fresh problems in terms of liquidity and collateral management, and in counterparty credit risk management, which net settlement mitigates.
Likewise, Mahabirsingh argues that it might be safer to capture the much-vaunted benefits of blockchain, such as having a golden source of data, a single register, and both commingled and beneficial owner accounts, using existing technology. He even argues that the principal benefit of blockchain – the elimination of reconciliation between different copies of the same information kept on separate ledgers – is already being achieved at his own CSD.
“At the Mauritius CSD we maintain a single, centralised database that records ownership at the level of the beneficial owner,” explains Mahabirsingh. “There are no reconciliation issues here. All operations, such as account openings, trade confirmations and allocations, are performed directly by market participants on the centralised database. Of course, they interact with the back-office systems of the brokers and custodians, but that is done by electronic file transfers. We have never had reconciliation issues in this market.”
Disruption by blockchain creates opportunities as well as threats
Mahabirsingh nevertheless recognises that the success of existing technologies is not necessarily stable. What would happen, he asks, if issuers found they were able to issue securities directly to investors over a blockchain network? If that happened, it is hard to see what value CSDs (and custodians) would add. As Mahabirsingh notes, this is not such a remote possibility that it can be dismissed out of hand. Capital is already being raised through the issue of tokens on blockchains.
But, as a mind marinated in circles-of-causality intuits, the threat is also an opportunity. Crypto-currencies have created a chance for CSDs to develop depository services for issuers of crypto-assets and tokenised assets, and digital custody services for their investors. There is no reason why, over time, mainstream financial assets should not be issued and custodied in the same way. This is why Mahabirsingh is encouraging his colleagues at the Mauritius CSD to actively explore how to provide custody and settlement services to crypto-currencies and other digital assets.
Blockchain technology is too immature to replace existing CSD systems
It is a strategy which will keep the CDS is line with the evolving digitisation of financial assets. But Mahabirsingh does not expect mainstream securities to migrate to blockchain quickly. He thinks the technology is still too immature to be used by CSDs to support core functions such as safekeeping and settlement. As he points out, there is as yet no industrial scale use-case of blockchain technology in the front office of the securities markets save crypto-currencies, whose true personality as money or securities has yet to be decided.
One less obvious respect in which blockchain technology is clearly immature is its dependence on so-called “smart contracts” to execute certain actions automatically on a blockchain network. “There is a risk in any computer programme that you run,” cautions Mahabirsingh. “Not only because the code itself may contain vulnerabilities, but because the environment in which the code is run may create further vulnerabilities.” Without an industrial-scale application of smart contracts on a blockchain network, the code itself is (almost by definition) insufficiently tested. Worse, in a blockchain network the threats to the security of a smart contract scale exponentially with the number of nodes.
“With CSDs, we are talking about critical systems holding trillions of dollars of assets,” warns Mahabirsingh. “And there are still questions about the scalability, security, robustness, performance and inter-operability of blockchain that remain unanswered. There are also a number of legal, regulatory, operational and governance issues that must also be addressed, not only at local level, but mostly at global level, before we see widespread adoption of blockchain in mainstream financial markets.”
Blockchain adoption depends on law and regulation as well as technology
It is a list of obstacles that tends to earn the contempt of blockchain evangelists. But, as a tekkie-turned-CEO, Mahabirsingh has learned that the biggest roadblocks to the success of a technology are not technical but legal and regulatory. Inevitably, to the systematic thinker, those roadblocks also function as ingredients of eventual success. “We talk about technology systems, but what has made us successful in Mauritius is a proper legal and regulatory framework, which offers certainty,” says Mahabirsingh. “In the rate of blockchain adoption too, that aspect will be critical.”
This is why he is confident that, even if there is widespread adoption of blockchain networks in mainstream markets, CSDs will continue to fulfil an important role in governing operational aspects of issuing assets on to blockchains and settling transactions in them. In this expectation, he is much influenced by his reading of the Blockchain Applicability Framework developed by Tom Davies of Cisco. From it, Mahabirsingh deduced that blockchain is not necessary if the CSD remains the centralised and trusted third party within a blockchain network. ASX, he notes, will remain a trusted third party within a private, permissioned network of market participants.
He nevertheless accepts that there is a threat of complete disintermediation of CSDs, especially if issuers do find a way of issuing securities directly to investors on a blockchain network. “There is a threat of disruption,” says Mahabirsingh. “We cannot hide ourselves from that. But we know how cost-effective we are now. The question is how we build a bridge from where we are now to that potential future.” Certainly, it cannot be right for CSDs, as systemically important infrastructures, to put their core functions at risk by embracing new technology – even if it saves them from obliteration by that self-same technology.
It would be equally wrong for any CSD facing the challenge of replacing its platform to ignore the potential of blockchain, however untried the technology and limited the network effects. But Mahabirsingh warns his fellow-CSDs to put prudence in the first place. “The potential of blockchain is wonderful – we can all agree on that – but I do not see why I should adopt blockchain technology now,” he says. “I have solutions already to all the problems we face. Our participants have new requirements from time to time, including developmental as well as operational requirements, but we have been able to respond successfully to all of them. So when people say, `You must adopt blockchain,’ I ask `Why? What problem am I trying to solve?’ The system I am currently using more than fits the bill. As an IT guy, I personally see more benefits in AI and machine learning than blockchain. The potential there is much greater than in blockchain, and it is developing very quickly.”
The Mauritius CSD is a bellwether for CSDs throughout the continent
But maybe the Mauritian CSD is exceptional. Since its foundation in 1996, CDS has remained as much a technology company as a financial market infrastructure. With only 12 people on the payroll, it even has the flavour of a technology start-up. As a subsidiary of the Stock Exchange of Mauritius, the IT team at CDS looks after both the securities trading and the securities settlement systems. They write and run their own computer programmes, maintain their own databases, own their own source code, and use their own developers to update and upgrade their systems.
As a small market in a small economy, the Stock Exchange of Mauritius has to seek growth abroad, and innovative technology is as important as law and regulation in attracting more issuers, investors and traders from abroad. It enables Mauritius to offer remote membership of the CSD as well as the exchange, dual listings, dual currency trading and multi-currency settlement, on mobile devices as well as point-to-point systems. The Stock Exchange of Mauritius and CDS are even capable of trading, margining and clearing futures and options, though these are not yet available in Mauritius.
“We try to stay ahead of the curve,” as Mahabirsingh puts it. Superficially, this appetite for leading developments in the securities and derivatives markets is at odds with the apparent scepticism of the managing director about the value of blockchain technologies. But the contradiction is more apparent than real. Mahabirsingh is studying blockchain at a detailed level. This year every member of his IT team, including the developers, will get in-depth training in blockchain technology. Once he feels CDS people are ready, Mahabirsingh will start looking for help. “If we move to blockchain technology, we will have to work with an external provider,” he says. “We do not have the experience to build the solution ourselves.”
When CDS makes its move, CSDs throughout Africa will follow what happens closely. Many African CSDs are drawing on the experience and expertise of the Mauritians already, and CDS will play a major role in determining the mood of the African securities industry as the blockchain bandwagon rolls through the continent. One opportunity to catch up with the thinking of its managing director lies in Marrakech on 10 April 2019, when Vipin Mahabirsingh will be moderating a panel discussion entitled “Blockchain: Opportunity or Threat?”
Panellists and delegate should expect Mahabirsingh to ask searching questions. “On the one side is the hype, and on the other is resistance to change and innovation,” he says. “Ideally, we will go beyond this false dilemma, and identify real, concrete benefits of blockchain in the securities industry. After the WFC, all the stakeholders – not just CSDs, but custodians, brokers, issuers and investors add regulators – should start working together, in co-ordinated global way, to chart a roadmap for adoption of a blockchain that brings tangible benefits to all of our stakeholders. It will not be easy, but it is what we should do.”