Disrupting Foreign Exchange with Blockchain


September 30, 2015

Last week Lykke announced a competition to build a new and superfast foreign exchange and settlement platform based on blockchain. Its Swiss founder is Richard B. Olsen. He was a fintech founder long before that buzzword entered our vocabulary. In the eighites, he established a real time financial information system and in the nineties, a Forex trading platform startup that was Web 2.0 before we had that term either.


Now it looks like he’s intent on pushing the envelope again, to create a marketplace that will take financial markets out of the “dark ages of batch processing”, to one that is based on newer technologies that can better serve the needs of today’s banking and financial markets institutions, stakeholders and end-users. He won’t be doing it alone. His business model is more Wikipedia or XPrize than SunGard or IBM. DealMarket Digest asked Richard Olsen about Lykke, entrepreneurship and technology ventures in a phone interview.


DealMarket: Which technologies are the most influential or most important in fintech today?


Richard Olsen: Distributed Ledger Technology (DLT) is the most profound trend. It is often called blockchain, proved as a concept with the digital currency Bitcoin.


Blockchain enables moving from a batch base system to immediate settlement systems. It can enable a global marketplace with the right of immediate access for all. It is the difference between proprietary systems and open systems.


Distributed ledger technology is not limited to currencies. It enables associated mechanisms where anything can be used to pay for anything, Air Miles, customer loyalty points, whatever two or more parties agree upon.


DM: Yes, it appears that the cryptographic blockchain technology that underpins bitcoin is seen as having staying power, even if bitcoin itself may fade away due to loss of trust (bankruptcy of Mt Gox and currency volatility). Many of the big name banks and consulting companies have published papers about blockchain (PriceWaterhous Coopers published a thought paper in August, BBVA, the Spanish institution published several research papers, the latest one in July, as has BNP Paribas, which wrote a thought piece on blockchain for securities trading). Other are doing R&D projects with blockchain specialists, such as Credit Suisse, Goldman Sachs and RBOS (BBC article), while UBS , Santander Bank and New York Stock Exchange, among others, are making small-sized investments in startup teams. These efforts indicate interest, but getting the financial markets industry to switch to a system like DLT is going to be a huge challenge. Where do you see resistance in the adoption of this innovation in finance?


RO: There is remarkably little resistance in the financial markets, not in the banks, nor regulators, businesses, nor customers. I believe consumers have a general frustration about how the system works. There is pent up anger about it. A lot of people are asking how come this is not more efficient. Why aren’t better results achieved?


The regulators are also looking for new answers. They tried to respond to the financial crisis and other problems in the banking system and they’re not yet satisfied with their response.


Actually, banks and financial institutions are locked in to legacy systems but they know it’s not viable. Batch processing is terribly inefficient. Even buying bread at a local bakery is more efficient and transparent and effective. You exchange money for bread. The transaction takes place in real time. We can stop the transaction at any time. With batch processing one side takes all the risk. Financial markets typically settle two days later, or longer. It was this fact that triggered Lehman Brothers‘ demise.


You can see the big banks embracing a new technology. The top management understands the necessity. Trends like DLT do not emerge out of the blue. They are a response, an evolution.


Trends like DLT do not emerge out of the blue. They are a response, an evolution.


OANDA’s trading platform was a political statement. It was a response to the status quo. It is popular because it is better and more fair than mainstream FOREX. You can trade any size, from a dollar to USD1 million to USD10 million and you receive the same spread. We were the first to charge interest by the second. Normally, interest is charged by the day but that is only because of batch processing. In a liquid market 98% of the volume is intraday. Volume and providing liquidity are the characteristics of FOREX and yet it‘s not addressing the intraday trading. It makes the system unstable.


DM:  DLT is up against existing clearinghouse and trading systems and there are challenges ahead. For example, the European securities association published in July its findings on digital currencies and blockchain systems after seeking input from the public and industry. It said that the systems present “interesting opportunities for achieving speedy and cost-efficient transactions”,  but it cautioned that there are “still many obstacles and limitations to overcome” before they can be considered for widespread use in ‘traditional’ securities markets, not least of which is getting the regulators around the world to cooperate on the frameworks. Which groups within financial markets are you hoping will adopt DLT first?


RO: We need to distinguish between ‘Bitcoin’ and the cryptocurrencies as currencies and the underlying distributed ledger – blockchain technology. People gradually understand that the distributed ledger technology is the true innovation.


The technology is a global notary service that replaces the island-based bookkeeping of today, where each financial institution has its own bookkeeping and it is difficult to verify accounts, etc. The large auditing companies, such as PWC or KPMG exist for precisely this reason. The clearing houses, auditing companies and all the many other players that developed precisely because the bookkeeping was island-based; these institutions cannot undo this innovation and turn back the wheel of time. Many people understand this and are aware that they will eventually have to embrace the technology. For adoption to happen rapidly it is important to build a marketplace, which uses the new technology. This is why we at Lykke are building a marketplace, which does exactly that.


We are focusing first on Forex, then bonds, then equities and finally commodities. What motivates me is a strong desire to reform these financial markets. It’s a drive to eradicate the difficulties and deficiencies in the system, to ask what are the deficiencies and why are they there and what kind of smart system can be developed to fix it. Smart systems make money. They’re useful and they’re fun.


DM: You have now founded three ventures; one of them raised venture capital. What is your view on venture capital financing innovations?


RO: Today, it is not necessary to get traditional venture capital anymore, because there are other methods to raise capital. I used to think that venture capitalists were all about helping the unorthodox and innovators realize dreams. That is in fact the pitch they effectively make. When in reality they’re far too interested in making money. Making too much money eventually corrupts.


Google founders were backed by investors that were interested in the underlying technology. The team developed the technology and much later they became pragmatic. It took the Nespresso team 25 years to create what looked like an overnight sensation. A business is like a garden. Be worried about the drought, but get people who love the gardening and have an affinity to the plants that you grow.


DM: Which entrepreneur’s do you admire?


RO: I admire mom&pop shops, anyone who has a small local business, bakeries, the kiosk in my village, fruit growers, all the entrepreneurs enabled by AirBnB. These are the tough and challenging businesses to run.


DM: Are you like other successful entrepreneurs who not only create startups but also invest in them?


RO: I am embarrassed to say that I have been too busy and involved with my own projects. I want to change this going forward.



slider_richard_olsen-770x425Richard Olsen

His first venture was  Olsen & Associates (1985), a real-time banking information system for financial markets. He also co-founded OANDA (1996), a foreign exchange market maker. It served up a speedy little currency converter, which was popular with general Internet users. It was a freemium business model, long before we had that buzzword. Its first customers were international businesses, tax authorities, accountants and central banks. Today it’s a forex market-maker and service provider with thousands of traders as customers… and 300 employees.
In addition to his businesses, he is visiting professor at the Centre for Computational Finance and Economic Agents at the University of Essex. He is the co-author of ‘Introduction to High Frequency Finance’, published by Academic Press in 2001. He has a PhD from the University of Zurich (1981) and Masters in Economics from Oxford University (1980). See his TEDX Talk Richard Olsen 2014.

Read more about Richard’s call for participants here.

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