“We are living in extraordinary times: when trade wars, unwindling of globalisation and volatility across markets has become the norm,” says Yvonne Zhang, now CEO and co-founder of tech outfit Aquifer Institute.
Zhang says shifting global conditions, as well as the ever-increasing search for arbitrage within financial markets, have raised problems for which blockchain can provide an “elegant solution”.
“There's not enough money to fund physical commodities trades – which are the lifeblood of the world economy ($1.5 trillion per annum as estimated by Asia Development Bank, as of October 2017). On the other hand there are plenty of investors frustrated with the lack of investable instruments that offer accountability and sustainable returns,” she says.
Much has been made of the many benefits of blockchain, particularly within financial services. However, for Zhang, there are three key, fundamental characteristics underscoring the technology’s appeal: data permanence and delegated authority; efficiency gains from automation of manual process through the use of smart contracts; and in the case of the public blockchain, open access to information without the need to build front and back end connections to view data.
Zhang spent 12 years in commodities trading and derivatives product structuring for Morgan Stanley, Societe Generale, ANZ and the Chicago Mercantile Exchange (CME) before launching Aquifer. The organisation has a number of interests, spanning traditional commodities trading to in-depth, fintech developments. The company’s platform is now in alpha version on the ethereum public blockchain, just 6 months from architectural conception. The team is now pushing toward full launch, while monitoring better risk protection measures. But change is afoot, as markets open up and technology is more widely distributed.
“Aquifer straddles a few industries: the centuries old commodities terminal market, collateralised financing, fintech R&D and quantitative sciences,” she says. “The pace of change - slowest to fastest as listed here - have been in this order for decades. In the next 5 years we see that the rise of multidiscipline platforms like us and the network effect generated in the ecosystem can push these industries forward faster than they are able to individually.”
Regulations have played a major part in shaping financial services over the past few years, and a growing premise has centred around the idea that organisations are innovating because of increased regulatory burdens of late. Indeed, it’s a claim reinforced by recent reports, including Fintech Decoded: capturing the opportunity in capital market infrastructure, published by the World Federation of Exchanges (WFE) & Mckinsey. But Zhang suggests that view doesn’t consider the bigger picture, and the number of products and services now available within the fintech arena points to applications far outside regtech applications.
“If we see fintech innovation as merely a means to make changes to something established, then yes, regulations do drive innovation as a by-product of propagating the change it originally intended,” she says.
“If innovation is driven by a motivation purely to save costs, naturally the best case scenario is capped at zero – you aren’t making money, you’re just saving it. That’s not a very good business driver,” says Zhang.
“Rather, I see fintech innovation as a catalyst that sparks regulatory change. Just look at the Securities and Exchange Commission’s digital working group, new regulatory regimes and sandboxes in Singapore, Hong Kong and Thailand, just to name a few of the many exciting positive value-accruing regulatory changes we’ve seen in the past 6 months.”
Also on the agenda for Zhang and many others in the market is the use of artificial intelligence (AI), for data gathering, automatic trading, and a multitude of other applications within financial services. And applications are ramping up fast: Zhang points to the CFTC’s 2017 report into automated trading that suggests that machine-driven volumes account for 83% of FX flows, 57% of energy derivatives and 48% of agricultural derivatives. That suggests the uptake of AI and machine-entrusted processes are growing in maturity.
But issues still need to be ironed out when it comes specifically to dealing with AI, she says.
“The core concerns have always been around data quality and accountability of outcomes, use cases such as robo advisory that aims to provide efficient allocation of capital and removal of intermediaries are especially vulnerable.”