Citi Perspectives 2024 E-commerce Edition

The blockchain is a means of unambiguously determining who owns what, and it does this through public key cryptography. What’s mine is mine In the regulated space, a bank deposit represents a claim by the depositing client against its bank’s balance sheet. Making a payment, for example, is simply transferring claiming rights. The traditional financial system is what McLaughlin refers to as a “machine for moving different kinds of claims from one balance sheet to another.” The banks in that traditional transaction must keep track of the claim to that money as it moves around the banking system. But the system’s ability to track those claims is less effective than it could be. One reason for this, notes McLaughlin, “is that the primary mechanismwe use today to track the balance sheet movements of the world’s institutions —whether it’s money, securities or equities — is messaging.” The system itself has worked well for many years but controlling the flow between different banks and central-bank-owned settlement systems, just to update the relevant balance sheet (and thus ownership), is a monumental task. With banks and clients needing more immediate information, it is often not possible within the current system. A message is sent, but the sender cannot immediately tell if it has been received or acted upon. If there are multiple parties in a transactional chain that uncertainty is amplified, and the chances of tracking transaction progress are limited. “Many of the reconciliation challenges we have in traditional financial services stem from that mode of sending messages to each other,” says McLaughlin. Blockchain offers a new way. Organizing a group of people via a group chat system such as WhatsApp —where the participants can see at once message status and individual responses — is far more efficient than individually emailing participants and waiting for, then coordinating, separate replies. In much the same way, with blockchain, every participant has a real-time status update of ownership. The ability for participants to simultaneously know what’s going on is referred to technically as a “state machine.” Blockchain can thus be described as a 24/7, multi-asset state machine; it is capable of keeping track of who legally owns what, in real time. Of course, it’s vital that across the regulated financial space, blockchain tokens are able to confer the same legal rights to ownership as the existing paradigm based on messaging. If the technology is separated from the legal instrument, it’s easy to see why this flow is maintained. Just as paper documents have represented legal title to assets for many hundreds of years, so digital documents in the dematerialized world could be unambiguously their equivalent. It follows that blockchain representations should carry the same legal weight for an existing legal instrument. While the technology used to record legal title changes —whether using a paper ledger, an IBM mainframe, a blockchain or any other means of recording title — it’s an arguable proposition that the underlying legal instrument it represents remains the same. 34 | Services Citi Perspectives