City Bankers Should Fear “The Vampire’s Quid”

Blythe Masters turned down the chance to run Barclays’ entire investment bank to work on banking applications of the blockchain. Here’s why.

I feel for the bankers.

It wasn’t long ago that they were spraying their bonuses around London and New York, jetting across the ocean, and generally behaving like Masters of the Universe.

But in the last five years, in London in particular, things have changed. A story out of Barclays bank last week says it all.

It’s about a banker called Blythe Masters. In the good old days, Blythe Masters was an investment banking superstar. She shot up the ranks at JP Morgan to become their youngest ever female Managing Director, at 28, and later the head of their commodities business. Along the way she invented the credit default swap, the debt derivative which helped to blow up the banks in 2008.

Fast forward to this week, when Barclays new chief tapped Masters to run Barclays’ entire investment bank (the 7th biggest in the world).

She turned him down! And not for another high flying investment banking job either. She turned him down to work on her new startup, which is focused on banking applications of the blockchain.

I wrote about the blockchain in Risk and Reward a few weeks ago. Today, I want to tell you in a bit more detail why Blythe Masters and the investment banking industry are betting big on the blockchain. And why it might put a few thousand bankers out of a job.

A terrifying digital ledger

First, a quick recap. What is the blockchain?

As I wrote last time, the blockchain is a type of computer code. It uses cryptography to create a trusted public ledger that anyone can inspect, but no single person controls.

Here’s how Marc Andreessen describes it:

“A blockchain is essentially just a record, or ledger, of digital events – one that’s “distributed”, or shared between many different parties. It can only be updated by a consensus of a majority of the participants in the system. And, once entered, information can never be erased.”

The genius of blockchain is that it can be trusted. Because everyone using the blockchain needs to consent to changes, no single person can control it.

So if the blockchain ledger says that you own something, that’s indisputable proof that you own it. If you give it to someone else by updating the ledger, that’s indisputable proof that the recipient owns it. As Blythe Masters said, “it’s analogous to email for money”.

We have a sort-of version of “email for money” at the moment. We pay a lot of money to banks, governments or lawyers, and they act as trusted middlemen. It works pretty well (that is, in rich countries where the authorities can be trusted). But it’s very very expensive.

Blythe Masters’ big idea is to replace all those expensive bankers with clever blockchain computer code. The World Economic Forum thinks she might be onto something: it says “the blockchain protocol threatens to disintermediate almost every process in financial services.” And Santander Bank reckons it could save banks $20bn a year.

Speaking in Bloomberg Markets, Masters said “You have front-end systems trading at warp speed, and nanoseconds of competitive advantage are being extracted, and yet the back end of Wall Street hasn’t been fundamentally overhauled in decades. Firms are dealing with greater requirements for reporting, transparency, and dissemination of data. Costs have gone up and revenues have gone down. This technology really gets to the core of all those issues.

“You should be taking this technology as seriously as you should have been taking the development of the Internet in the early 1990s”.

Now everyone’s scrambling to build the first giant blockchain business. Even Goldman Sachs, the “vampire squid” investment bank ranked number one in the world, filed a patent for its own blockchain currency last week (its nickname? “The vampire’s quid”).

London’s at the heart of all this. With the Silicon Roundabout technology scene and the City of London half a mile away from each other, it’s become the global capital of financial technology, aka Fintech.

I’m watching the new companies and the new scene. Because the question seems to be not whether, but which blockchain companies make it big.

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