Blockchain, if you haven’t heard already, is all the rage these days. Once the plaything of anarchist nerds, the technology has been snatched away by retail giants like Walmart and Investment banking companies as large as JP Morgan.
But not everyone in the institutional financial space has leaped at the opportunity to climb aboard the blockchain bandwagon. A combination of skepticism and fear of violating compliance rules means many financial companies are, to put it in the words of RBS’ ex-Head of Emerging Technology, moving at a glacial pace when it comes to blockchain technology.
That has left room for a number of new firms to enter the space and start creating blockchain-based solutions for financial institutions. With regard to the foreign exchange (FX) market, London-based Cobalt, with a post-trade services offering, has been one of the most notable start-ups trying to get banks to start using blockchain technology.
But across the pond in the great US of A, a new firm wants to start changing the way institutions trade in the FX market. 9th Gear Technologies, the brainchild of angel investor Maryanne Morrow, is setting up a B2B institutional marketplace for the FX market.
What will that entail? To find out, we spoke to Morrow about her plans for 9th Gear Technologies, what makes it unique and how she and her colleagues will get institutional FX players to start trading on the blockchain.
Can you give a brief overview as to what it is that 9th Gear Technologies does?
9th Gear Technologies is a B2B institutional marketplace that enables same day Foreign Exchange (FX) transactions with a lending capability. We increase both trading and payments liquidity, offer greater transparency, reduced risk and lower cost to vastly more participants.
Through a digital transformation of the backend, 9th Gear has re-imagined the FX transaction, moving from today’s process where a handful of global banks dominate the industry and trades take two days to settle, to a process that is open to brand new participants and can be completed in minutes.
The word ‘institutional’ conjures up an array of different companies – whether it be hedge funds or major banks. So who in the institutional space will you really be targeting?
We have three specific target audiences:
Market Makers: Price makers consist of the top 50 or so global banks that make markets in currencies, benefit from the buy/sell spreads, and provide trading liquidity to the market.
Price takers: Price takes are customers looking to buy/sell currency to meet demands for the purchase/sale of goods and services or hedging currency exposures. Price takers will look to source rates from market makers and execute trades.
Lenders: Lenders provide liquidity to the trade in the form of a loan of cash in several different currencies depending on the type of trade. Lenders may include traditional lenders, such as banks and custodians, but new markets entrants gain access through 9th Gear – corporates and asset managers. The top 25 US corporate cash holders maintain close to $1T in cash and cash equivalents. 9th Gear provides investors with the ability to make short-term currency loans to their approved credit list.
As the solution continues to expand, other capital markets transaction types that include commodities, derivatives and a variety of security types will become part of the process. This expansion leverages the work done for FX and expands to the lending of securities with new entrants such as securities lenders and custodians.
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A lot of institutional companies still seem very skeptical about adopting blockchain – how do you go about convincing them that it’s worth adopting your technology?
The key difference with our technology is that it allows for the actuality of real-time transaction and settlement. There is no current technology that can perform in this manner.
There are several consortia of banks that are trying to achieve the same outcome, but our technology is what sets us apart. By creating the process in the manner we have, we draw in additional liquidity to the market that enables all payments to be made on a real-time basis. Removing batches and providing liquidity is the only way to get to same day trading/settlement.
One major problem for companies like yours, who are trying to sell to the institutional market, is compliance risk. Many incumbent vendors are now in a position where they probably wouldn’t meet banks’ requirements for addressing those risks. Is that a problem for 9th Gear and how do you plan on overcoming it?
While every bank and financial institution takes an individual view of these types of risks, 9th Gear is using a technology base protocol, Quorum, which has already been implemented by more than 100 bank members of the new Institutional Information Network (“IIN”).
Developed by JP Morgan, Quorum possesses the key features of speed and security necessary to be able to handle financial transactions of this magnitude. Acceptance by such a large group of banks indicates that the financial community at large will be comfortable with the technology going forward.
A lot of companies seem to be slapping ‘blockchain’ on to everything in order to give their products and services a bit of pizzazz. Why is blockchain technology a vital component of your product – could it work without it?
While blockchain technology is the infrastructure we are building to allow same-day payments, we could have created this company ten years ago using a traditional database structure. Current payment rails rely on ordinary messaging systems and wire systems like CHIPS, ACH or FedWire. These are generally batch-process systems, which precludes them from delivering funds on a real-time basis. Blockchain technology is the piece that allows validation of available funds and subsequent delivery without requiring the current payment rails.
How did you go about funding the company?
We started the traditional startup path using subdued capital from folks we know who understand our pedigree and professional work ethics. We have expanded that initial funding round to a few Angel groups. We have a deliberate capital pathway that is milestone based.
Who is working alongside you? How many people are there at the company and are there any ‘big’ names, from either the technology or financial world, working with you?
We are very proud of our tenured team of experts that generally fall into two categories: (1) deep financial expertise with over 300 years of cumulative experience in capital markets / institutional finance and (2) high-tech executive veterans in key management roles including CFO, CMO, and Head of Development.
You are yet to go live, when do you plan on doing so and has anyone agreed to use your services yet?
We plan on going “LIVE” in Q1, 2019. Right now we are concentrating on proofs of concepts (“POCs”) with a hand-selected list of lenders, takers, and price-makers. We have had substantial interest and have already signed up large global banks.