Why Russia’s CSD Believes Blockchain is a ‘Blue Ocean’ Opportunity

Thus far, 2016 has seen no shortage of financial incumbents touting blockchain, but perhaps the most surprising has been the warm embrace the tech has received from central securities depositories (CSDs), the entities that serve as intermediaries for securities transactions.

Given the role of these businesses as often the sole arbiters of national and international markets, there has long been speculation they might be among the businesses threatened by distributed ledgers, or blockchain-enabled database environments in which the entities that are today served by CSDs are able to transact more directly.

But, movements by the the Depository Trust & Clearing Corporation (DTCC) in the US and the National Settlement Depository (NSD) in Russia have shown a willingness to use blockchain as a tool to expand and improve CSD operations. The NSD announced in late April that it had carried out a proof-of-concept for how blockchain could be leveraged for electronic shareholder voting.

Built on the alternative blockchain platform NXT in partnership with DSX Technologies, the prototype seeks to help reduce pain points that, today, discourage shareholder participation at major meetings.

Alex Yakovlev, head of decentralized solutions at NSD, however, believes that this project only scratches the surface of what could be built with a blockchain-based system.

According to Yakovlev, blockchain opportunities currently fall into two camps: those that pursue cost reductions and “blue ocean” opportunities, and those that seek to rethink how the financial industry operates as a whole.

Perhaps surprisingly, Yakovlev said that for the NSD, its interest remains in the uncharted territory that is being carved out by cryptocurrencies like bitcoin and ethereum.

Yakovlev told CoinDesk:

"At the very beginning, we came to conclusion that blockchain cannot provide more operation excellence within existing business processes and inter-company relations without global changes. … Blockchain is about business models that cannot be supported using centralized applications paradigm."

Yakovlev said that the NSD believes that blockchains are perhaps not best suited for replacing traditional database systems, but rather should be used by financial institutions to seek new customers, new markets and new digital assets.

Yet, he sought to position the NSD as more unique among its peers in recognizing and pursuing more experimental or novel applications.

"Traditional financial organizations tend to think more about the first type [of use case], though many are starting to realize that blockchain could possibly allow them to navigate through the 'blue ocean', for example, by inventing new asset classes," he said.

Path to concept

According to company representatives, the NSD first began looking into blockchain in April of 2015, an exploration process that was further encouraged as more major financial institutions began to go public with similar tech trials.

Yakovlev said a cross-discipline working body was soon created to unite NSD’s business leaders and IT specialists into a dedicated blockchain group, a tactic that is becoming increasingly common at major financial firms.

From there, he said, five to six proofs-of-concept were proposed, with proxy voting emerging as the choice for the company’s experiments, as it “wasn’t achievable” in a centralized system, Yakovlev said.

"The main problem with all e-voting solutions is, first of all, the voter is not able to verify his vote has not been modified before it is processed, or that votes are correctly counted. The transparency of blockchain and its distributed nature allowed us to create a voting process that provides a voter with [the] right tools to address both problems," he continued.

The NSD is not alone in seeking to explore this use case, as it follows an announcement in early 2016 from Nasdaq that has found it developing blockchain tech for proxy voting for its marketplace in Estonia.

Choosing NXT

Yet another factor that separates the NSD from its peers is its choice of technology.

Though it has also elected to implement a private blockchain system, it has done so using technology provided by alternative blockchain community NXT. An early standout of the crypto 2.0 community, NXT was designed as a pure proof-of-stake blockchain, though it has long faced criticisms for perceived centralization problems as they relate to the ownership makeup of its network token.

But, Yakovlev said that the specific technology was secondary to its ability to verify high transaction volumes.

He added:

“But we cannot say that NXT is a silver bullet for all use cases – there are other cases where other platforms or proprietary solutions need to be used.”

As part of its research, the NSD invited developer teams from Estonia, Israel, Russia, the US and the UK to pitch the company on how their technology could enable the use case, with DSX emerging as the winner with its NXT-based proposal.

Through the system, bondholders submit votes to parties authorized to receive those votes. Votes are then counted and submitted to the blockchain by the NSD, where they would be publicly verifiable.

Next steps

As far as further blockchain developments at the NSD, for now, the financial firm is focused on completing its voting-oriented pilot.

Yakovlev said that the NSD now will seek customer feedback to help build on the early stages of the project, with security audits and legal due diligence to follow. Still, despite the sometimes sensational headlines from the region, the NSD doesn’t believe its efforts on the latter issue will be impeded.

While certain authorities within Russia have long been pushing for a ban on cryptocurrencies, Yakovlev said that the controversy surrounding the technology was "far from the reality".

“It is needed to distinguish cryptocurrencies which legitimacy is still under discussion there and blockchain itself as underlying technology,” he said.

Such comments follow statements and actions from Russia's central bank that have found it taking a lead in exploring the technology. This has included forming an industry roundtable and encouraging further research into the topic, developments Yakovlev said are encouraging innovation within Russia.

He concluded:

"Blockchain research will be invested and continued in Russia and more prototypes are to follow as a result."

Russia map image via Shutterstock