Speech to Insurance Regulators: Fixing a Fixable Solvency Risk to Insurers

Slides available here:  naic_long_miami_dec2016_vfinal

Thank you to the National Association of Insurance Commissioners (NAIC) for your invitation to speak at your Fall meeting about how blockchain technology can fix a low-probability, but high-severity threat to insurer solvency:  lack of beneficial ownership tracking of securities by the securities industry.

Blockchain is not the only solution to this problem, but it is an exciting and complete one!

I care passionately about restoring title to the true owners of securities–in other words, giving asset owners direct ownership in their assets–and this is a major reason why I jumped to a blockchain start-up after 22 years on Wall Street.  No, you do not actually own the securities you think you own in your brokerage account!

During nearly all of those 22 years on Wall Street, I was fortunate to work in and around the insurance industry and care deeply about its financial health.  In the old days during regulatory exams, insurance regulators used to audit the paper certificates held in insurers’ vaults to verify that securities recorded on Schedule D were actually there.  This is no longer possible to do today, owing to the indirect manner of securities ownership and the use of omnibus accounts by layers upon layers of securities industry intermediaries.  It’s time to go back to the future and restore beneficial ownership tracking–or, better yet, actual ownership of securities by those who think they already own the securities!

With permission from my company, Symbiont, I’ve included my NAIC E Committee presentation slides in this blog post.  This is my second speech to the NAIC on this topic, and the first in a public forum.

As Delaware Chancery Court Judge Travis Laster said in a recent speech to institutional investors, “I want you, the institutional stockholders of America, to take back the voting and stockholding infrastructure of the U.S. securities markets…The current system works poorly and harms stockholders…The plumbing needs to be fixed.  A plunger exists.  The takeover [of securities industry plumbing by institutional investors] doesn’t have to be hostile.  It can be friendly.  But it needs to be done.”

Indeed, it does.

As I’ve said many times, the biggest beneficiaries of blockchain technology are long-only investors:  insurance companies, pension funds, mutual funds, and Mom & Pop investors.  They’re the biggest losers from today’s lack of beneficial ownership tracking in the securities industry.

I stand ready to educate and assist the insurance, pension and mutual fund industries in fixing this problem.  How can regulators measure insurer solvency when securities–especially U.S. Treasuries–may be over-issued?  Even federal securities regulators do not know how leveraged the financial system truly is, because multiple financial institutions report that they own the very same securities at the same time–and securities regulators have no means by which to back out the double- or triple-counting of assets.

Lack of beneficial ownership tracking is a low-probability but high-severity risk to insurer solvency, but it is real.

Blockchain technology is one of many possible solutions to the problem.

Thank you for your interest!


Why I Chose to Join Symbiont


Far and away the best prize that life has to offer is the chance to work hard at work worth doing.”   – Teddy Roosevelt

The blockchain community is hard at work, doing work that’s worth doing.  I’m elated to join it full-time!

Recently I became president of Symbiont and chairman of its board of directors.

I chose to join Symbiont because we have the best technology platform for financial sector uses, and we have a great strategy.  Our software works.  It’s fast.  It’s secure.  It does many things competing platforms cannot do.  Ours is the only smart contracts platform that was purpose-built for institutional financial markets.  We’re ahead of our peers in the race to build production-ready software, because it’s already going into production.

Symbiont’s strategy met my two philosophical criteria for joining:  (1) investors will actually own the assets issued on Symbiont’s blockchain, which is a huge improvement relative to how securities are owned in today’s market structure; and (2) Symbiont’s platform can store all transaction data and documentation in a secure, anonymous manner without sacrificing institutional-level network speed.  (Our speed is multiple orders of magnitude faster than competitors, as we detail below).  Consequently, regulators can gain a tool they do not have today:  a real-time view into how leveraged the financial system is.  This capability of our platform more broadly opens a new “regtech” frontier.  If you follow my blog (here and here), you know how passionate I am regarding these two topics!

My informal collaboration with many different blockchain start-ups began 2½ years ago at Morgan Stanley, where I served on its distributed ledger technology working group.  I’ve been working (unpaid) to advance the ecosystem since leaving in April 2016.  The journey from Morgan Stanley to Symbiont was amazing, partly because it involved digging into multiple projects with blockchain players—from start-ups to consulting firms to software companies to regulators to potential consumers of the technology.  It brought me through Janet Yellen’s office at the Fed, to the floor of the UN as a conference delegate, to a workshop with the 50 state insurance commissioners, and to discussions with Washington regulators about how blockchain technology can help fix deep problems in the financial system.  But it also entailed a difficult decision to step away from my other passion:  fixing the pension problem.

So now begins, for me, the long journey to bring the huge benefits of blockchain technology to fruition, thereby helping our customers do things in simpler, cheaper and faster ways—while making capital markets fairer, safer and more transparent as we go!

Why I Chose Symbiont

  • Symbiont’s competitive advantage is our smart-contracts technology.  

Our architecture is designed specifically for financial services uses.  It’s sophisticated and it’s fast.  It can support substantially more functionality, in spite of its superior performance, relative to competing distributed ledger solutions.

Smart contracts enable our customers to automate operational workflows that today are inefficient, error-prone, sometimes manual, and always require reconciliation across parties.  

Smart contracts are all the rage, but most competitor platforms cannot offer full smart contract functionality because they are developed as extensions to Bitcoin’s payment model, which is fundamentally too restrictive for smart contracts in institutional financial services.  A tiny number of true smart contract platforms exist.  Of those, Symbiont is the only one purpose-built for financial services.  

 Distributed ledgers themselves cannot automate business processes but smart contracts can.  The blockchain industry generally has not distinguished the various components that make up what we call a blockchain, which is why many of our competitors’ platforms have tightly coupled their consensus systems and smart contracts systems.  By contrast, since its earliest days, Symbiont has enforced a clear distinction between these components, making its system significantly more elegant and powerful.  A consequence of this design decision is that Symbiont’s smart contract system can run on any distributed ledger.  (But it runs on our own because it’s the best!  Details below…)

Before moving to the next point, I must share that I’m an Ethereum fan and am involved with the SingularDTV project.  In the institutional financial services arena specifically, I believe Symbiont’s platform will win.  Symbiont’s smart contracts can do things that are mission-critical for financial institutions and that Ethereum-based smart contracts cannot do, mostly due to Ethereum’s language and protocol limitations.  One example is the case of parties agreeing to amend a smart contract after it’s published to the blockchain (i.e., the infamous DAO).  Contract amendments happen all the time in financial services, and Symbiont engineers built our smart contracts to anticipate such real-world financial services functionality.  Symbiont offers protocol-level support for amending contracts.  By contrast, Ethereum has none.  Only Symbiont’s system allows both the code that determines the contract, as well as the contract itself, to be modified at any time by agreement of the parties.  This is just one example that demonstrates why the financial sector needs purpose-built platforms.


  • Symbiont’s platform has more functionality, with superior performance and security, relative to competing blockchains.  And it’s already going into production.  

Symbiont’s platform can store data in a private and secure way, without sacrificing institutional-level speed.  The ability to store data on-ledger—including all transaction documents—is huge, and will immeasurably help everyone (the contracting parties, operational staff, auditors and regulators) keep track of what really happened in a business transaction.

Symbiont’s platform is not merely a shared, timestamped log to record that an agreement took place, which is exactly what many competing platforms are.  Rather, on Symbiont’s platform all the terms of the agreement are recorded on-ledger, and that’s why we call our smart contracts “smart securitiesTM.”  A Symbiont colleague put it this way:  a timestamping ledger can guarantee that you won’t lose your trade confirmation, but it doesn’t help with much else—so it’s not very meaningful.

Symbiont’s system is capable of being used as a record-keeping platform, allowing storage of archival data (e.g., Delaware Blockchain Initiative) and maintaining a chronological record of multiparty workflows and signatures (e.g., syndicated loans and reinsurance syndications).  This aids in compliance, regulatory reporting and dispute resolution.  So in addition to being able to automate business processes via smart contracts (by recording inputs, recording and executing business logic, and then recording outputs on-ledger, on a confidential and immutable basis), Symbiont’s platform is a whole new breed of market infrastructure.

Symbiont’s smart contracts platform is modular—built up from multiple software services with distinct functionality—while competitor platforms are monolithic pieces of software, with limited modularity.  This means we can spread smart contract execution across multiple machines—achieving superior scale, performance, resiliency and ease-of-updating relative to our competitors.  It’s harder to build service-oriented software that works, but Symbiont has done it and our clients already appreciate our consequent greater functionality and potential for further innovation.

And here’s what’s amazing:  Symbiont figured out how to store user data anonymously on-ledger while still achieving institutional-level network performance.  Symbiont’s ledger is currently processing 80,000 transactions per second in a single region, and tens of thousands per second globally.  Plus, transaction latency is on the order of milliseconds.  So Symbiont’s software is not just outperforming all competitors whose comparable statistics we know—it’s outperforming them by multiple orders of magnitude.

Symbiont’s ledger is currently processing 80,000 transactions per second in a single region, and tens of thousands per second globally.  Plus, transaction latency is on the order of milliseconds.  So Symbiont’s software is not just outperforming all competitors whose comparable statistics we know—it’s outperforming them by multiple orders of magnitude.

Competing systems are hybrids that store data and business logic somewhere else, requiring disparate systems to communicate over multiple channels, using the ledger just as a timestamping mechanism.  Our system, on the other hand, supports encrypted, point-to-point communication over the ledger itself, allowing us to put all business logic on-ledger while meeting the financial industry’s standards for privacy.  We think storing data and business logic on-ledger is fundamentally necessary to achieve the true promise of blockchain technology, which is the radical simplification of business processes.  It’s hard to create software that achieves this and is fast, but our development team did it.  Symbiont is better!

News that Symbiont is already implementing our platform at a production level may surprise industry watchers because Symbiont has kept a relatively low profile, and intends to continue to do so.  Our publicly disclosed customers include the State of Delaware (Delaware Public Archives project) and a top European insurance company (catastrophe swap pilot project).  Other customers are not yet disclosed.  If you’re not familiar, Symbiont was the first blockchain start-up to eat our own cooking by issuing securities in our own company on our platform, which happened already more than a year ago (on August 4, 2015).


  • Symbiont’s platform focuses on newly originated assets, not on tokenizing pre-existing assets.  

A former colleague once wisely observed that existing IT architecture in financial services merely digitized legacy business processes, and that the sector hasn’t yet reaped the true benefits of digitization because its business processes are stuck in the pre-digital age.  What wisdom!

On Symbiont’s platform, financial assets will exist natively on the blockchain during their entire lifecycle, from origination to maturity.  They won’t ever exist in paper form.  This contrasts with competing platforms that tokenize existing assets previously issued in paper form.  I believe tokenization-focused blockchain start-ups will add value too.  But tokenization does not fundamentally change inefficient business processes—actually, it adds extra operational steps to tokenize existing assets.  Maximum efficiencies are achieved by radically simplifying business processes.  That’s what Symbiont’s technology does.

Maximum efficiencies are achieved by radically simplifying business processes.  That’s what Symbiont’s technology does.


  • Symbiont has prioritized building our tech to create a first-mover advantage.  

I commend Mark Smith for his strategy to build a lean, developer-heavy team from the beginning.  Surprisingly few of our employees don’t write code!  It’s why Symbiont has a first-mover advantage.  The team’s results speak volumes.  Symbiont is ahead of its peers in delivering a distributed ledger and smart securities platform that already works.

Symbiont’s strategy to prioritize building the software comes from his deep experience as a successful fintech entrepreneur.  Symbiont is the 6th fintech start-up Mark co-founded.  Of his prior five, four had successful exits (The NexTrade ECN, MatchBook FX, Lava Trading and Anderen Bank of Tampa Bay), and the fifth is still operating.  It’s a privilege to work with him, his co-founders, and the terrific team of rocket scientists they’ve built!


  • Symbiont is currently focusing on 3 product areas—the Delaware Blockchain Initiative, insurance and syndicated loans—and all of them are ripe for big improvements in business processes.  We are a fintech, insuretech and regtech company!

I’ll just touch the surface here.

It was Mark Smith’s idea to approach Delaware with the proposal to change corporate law to enable corporate registrations on a blockchain, along with counsel Marco Santori of Pillsbury.  Delaware’s governor embraced it.  By giving corporations a choice to register either via traditional stock certificates or on a blockchain, likely by early 2017, Delaware will unlock the potential for fundamentally simpler business processes during a corporate lifecycle—from initial incorporation, to capital raising, to M&A, to investor communication and to winding up.  Delaware’s move will also unlock the potential for radically simpler business processes in the securities industry.  Practically speaking, I expect Delaware’s action to impact markets for private equity, IPOs, asset-backed and mortgage-backed securities, and commercial real estate.  Symbiont is already working with Delaware to record its state archives on Symbiont’s platform by creating a new category of smart assets called smart records.  The State is constructing a roadmap for adding other government data to Symbiont’s platform—potentially including government data such as professional licenses, property deeds, liens and birth/death/marriage records, among others.  (Again, how many other institutional blockchain platforms can handle such data on-ledger, in a confidential manner and with speed??  Only Symbiont can!)

In insurance, Symbiont successfully provided the technology for a top European insurance company’s catastrophe swap pilot with Nephila.  This has opened the floodgates of interest in blockchain technology from the insurance industry, which is now exploring the possibility of blockchain to reduce risk and operational costs.  I’ve worked in and around the insurance industry for 22 years and have seen many ways blockchain can help both insurance companies and insurance regulators alike.

In syndicated loans, Symbiont has a joint venture with Ipreo, a key market infrastructure player.  The syndicated loan market is a classic example of a business line in which front-office growth outpaced back-office investment, and this is true across the industry.  I was fortunate to dig into this product area with key players before leaving Wall Street.  Faxes and spreadsheets are still commonly used, which means incumbents recognize the need for upgrades and are not firmly wedded to legacy systems.


Parting Thoughts

To blockchain ecosystem colleagues, I wish all of you well!  Let’s compete vigorously—and in the process create a fairer, safer, more efficient and better financial system!

To pension industry colleagues, you have important work to do!  There’s so much more to be done in pensions, as I expect >$500 billion of corporate pensions ultimately to settle but only about $45 billion have settled to date.  It was an honor and privilege to work with so many talented people in the field.  Fare thee well!

To financial services colleagues, blockchain technology can increase your return on capital by providing a profitable way to transition from capital-intensive principal businesses to fee-based agency businesses. Software will automate inefficient business processes, thereby allowing the industry to realize the true benefits of digitization—finally!

To corporate clients, I’ll still be focused on helping you solve your challenges—not pensions anymore, but different ones now!  Specifically, I look forward to helping you reduce your cost of capital by improving your execution in securities offerings and loan syndications, and to helping you free up working capital by improving your execution in cross-border payments.  As issuers, Symbiont’s smart securitiesTM platform offers you tangible benefits, and you will hear from us soon!

To my new colleagues at Symbiont, I’m all-in!  I’ve personally stepped up with a substantial investment in Symbiont’s Series A round.  Let’s do this!

No, You Don’t Really Own Your Securities


That’s right. You think you own securities in your brokerage account, but you don’t.

A company you’ve probably never heard of, called Cede & Co., is the official owner of >99% of the securities outstanding in the U.S. What’s in your brokerage account is probably an I.O.U. See the fine print.

This is a feature of U.S. capital markets that arose for historical (not nefarious) reasons. But those reasons long ago faded, and yet this vestige of yesteryear’s market structure remains. Were we to create a new market structure from scratch, it would look nothing like it does today.

Main Street investors lose, folks! This is a consumer protection issue. Winners are the privileged few who are in a position to exploit leakages caused by this market structure, at the expense of Mom & Pop.

Podcast here (20 minutes long). Try here if it doesn’t load.

Slides available here:  no you don’t really own securities_AS PRESENTED

Pension funds, mutual funds, insurance companies and other types of long-only investors unnecessarily bear (1) counterparty risk, (2) operational risk and (3) over-issue risk that can artificially suppress the value of securities. These 3 risks are inherent to today’s crazy market structure. Securities pass through a chain of leveraged intermediaries and are accounted for on an aggregate (not individual) basis—making it impossible to verify that securities accounting is 100% right 100% of the time. In the podcast and slides, I provide real examples of how investors lost because of this market structure.

An example:  based on the IMF’s estimate of the length of collateral chains, only 1 of 3 investors who believe they own a U.S. Treasury security actually does. In the repo market, multiple investors report that they own the same asset at the same time (usually a Treasury security). Fails are a daily occurrence in the repo market.

Hey, here’s hoping the musical chairs never stop! Seriously. Hope!

The good news? Blockchains solve all of these problems!

Coming changes to corporate law will soon permit issuance of securities directly on a blockchain itself, which will give issuers the option to circumvent this risky market structure altogether—thus avoiding its layers of leveraged intermediaries and inherently opaque omnibus accounting. Delaware (the key state for corporate registrations) is leading the charge, and other states are likely to be very fast followers.

Among the winners from blockchain technology are:

  • entrepreneurs, who will no longer be required to cede their ownership of the shares of the companies they built to Cede & Co. when they go public in an IPO. Folks, a better IPO alternative is coming soon!
  • pension funds, mutual funds, insurance companies and other long-only investors, who will no longer bear unnecessary counterparty, operational and over-issue risks. I believe securities chain-of-custody will soon be standard due diligence for ERISA fiduciaries, fund company distribution platforms, independent fiduciaries in pension risk transfer transactions, and insurance company risk officers. Further, I believe long-only investors who have stronger chain-of-custody arrangements will gain a competitive advantage in gathering assets, not to mention absorb fewer costs for TMPG fails, glitches in posting collateral and other operational hiccups.
  • issuers, who will have visibility into who owns their securities at all times, who can be confident of no leakage in close corporate votes, and who can reduce mistakes involved in shareholder records.
  • Main Street, who will re-gain ownership rights in securities and benefit from FAIRER, safer and more transparent markets.


American Banker wrote a terrific article on the topic here.

Please read important disclaimer here.



Pensions: Ugh, Again?!

Dear Corporate Pension Plan Sponsors,

Pensions are again climbing up the list of priorities for corporate treasurers, as the funded status of defined-benefit pension plans is once again within spitting distance of all-time lows. Funded status dropped during Q2 2016 by about 2% to the mid-70s on a percentage basis for the average S&P 500 plan.

Treasurers should ask themselves 3 questions: (1) are PBGC variable-rate premiums starting to bite, (2) would a debt-funded pension contribution before year-end make economic sense, and (3) does the drop to record lows for long-term U.S. Treasury yields call for a reassessment of pension strategy?

1.  Are PBGC variable-rate premiums starting to bite?

PBGC premiums are effectively a tax on the plan sponsor that does not benefit the plan itself, which is why many companies seek to minimize the cost. The recent drop in interest rates and resulting rise in pension liabilities will snag many companies into owing variable-rate premiums for the first time.

What can a corporate treasurer do?

Because variable-rate premiums are tied to “unfunded vested benefits,” companies can reduce this cost by funding some or all of the plan’s unfunded vested benefits. Several innovative funding structures can help plan sponsors minimize variable-rate premiums without permanently trapping cash.

Many companies will now start solving to minimize the amount of variable-rate premiums owed when determining their pension contribution strategy. This is a big change, since for years the real constraint on pension funding decisions for most companies had been the leverage concerns of rating agencies and investors. Statutory funding requirements have been watered down by interest rate smoothing mechanisms enacted by Congress post-crisis, so much so that minimum required contributions had not been the binding constraint for most companies in recent years.

The “corridor” that smoothes interest rates for funding calculation purposes does not apply to variable-rate premium calculations, which is why so many companies will now owe variable-rate premiums amid record low long-term interest rates.

And their cost can be substantial. Variable-rate premiums jumped this year to $30 from $24 per $1,000 of unfunded vested benefits, plus another $1 due to inflation indexation.

2.  Debt-funded discretionary contributions: return of a market trend?

Unless interest rates rise substantially during the third quarter, I would expect debt-funded pension contributions to return en masse during the fourth quarter as companies shore up pension plans before the year-end valuation date.

The environment for issuing long-term debt to fund pension contributions is ideal for many companies: record low long-term Treasury yields and tight corporate spreads. Cost savings from avoiding PBGC variable-rate premiums help make the net-present value calculation positive—but the math is always company-specific.

3.  Should you reassess pension strategy given record low long-term Treasury yields?

In my inaugural pension blog post from April, I encouraged corporate treasurers to think through what would happen to your company’s capital structure if interest rates go negative and your pension liability balloons. The urgency of this exercise has increased in light of recent events.

As a reminder, U.S. corporate pension obligations rank “super-senior” within corporate capital structures (i.e., they come first in line, pretty much).  When interest rates drop and the pension liability grows, the pension’s implicit claim on corporate assets grows—and if the pension liability grows faster than corporate assets grow, it means fewer corporate assets would be available to the debtholders and stockholders (who rank below the pension).  This explains why stock prices and bond spreads of companies with big pension liabilities tend to lag or correct when interest rates drop.

I’ll close with the following discussion about interest rates, meant to be thought-provoking.

Again, no investment advice on this blog!

Here’s a quarterly chart of the U.S. 10-year Treasury yield. Not once since 1980 has the 10-year Treasury yield risen above its prior peak during a rising interest rate cycle, before rates turned lower again as wheels came off somewhere in the economy. Now it’s happening again, as futures markets are implying the Fed’s rate rising cycle may already be over and markets are starting to imply a non-zero probability of rate cuts.

What do you see in the 10-year Treasury yield chart?  I see an unbroken trend of lower lows and lower highs across 36 years of interest rate cycles. Yet, the consensus believes interest rates are mean-reverting and will move higher over time. Do you see evidence of that?


In the spirit of a “four corners of the problem” analysis, calculate what would happen if the discount rate on your pension plans went to zero and stayed there for infinity. How many of your corporate assets would implicitly belong to pensioners, and how many (if any) would be left for stakeholders who rank junior to pensioners in the capital structure?

The entire Swiss yield curve, out to 50 years, now has negative yields. If this doesn’t normalize, does this mean—in the coming years—we will see impairments in the carrying value of multinational companies’ Swiss subsidiaries that have material pension obligations?

The good news? There’s plenty of time for corporate treasurers to plan ahead! I’m expressly making no forecasts in this blog post—only encouraging companies to reach a “no regrets later” consensus about pension strategy in light of record low interest rates. If you knew that the Swiss situation would hit the U.S. in X number of years, what would you wish you’d done differently today? How much interest rate risk should your company’s capital structure take? Would you fund the pension plan differently, manage interest rate risk differently, or more aggressively pursue lump sums or risk transfer strategies?

It’s all worth pondering and scenario-planning.

Let’s hope you never need that plan!


This blog post is for plan sponsor use only. It is not intended as investment advice. The author is not providing services to any employee benefit plan, including as fiduciary or advisor to any employee benefit plan, and should not be mischaracterized as such. Please see important additional disclosures here. Thank you for stopping by my website!

What Comes Next for Pension Plan Sponsors?

Dear Corporate Pension Plan Sponsors,

With the first quarter of 2016 ending, the agenda of corporate treasurers has four items pertaining to the defined-benefit pension plans you sponsor:  (1) another decline in funded status, (2) higher PBGC premiums starting to bite, (3) return of debt-funded pension contributions in the market, and (4) capital structure scenario planning, as negative interest rates appeared in more countries around the world during Q1.

1.  Funded status declined yet again: should you do anything?

The average S&P 500 company’s pension plan ended Q1 2016 approximately 3 percentage points lower than at year-end.

As a result, corporate treasurers should think about two factors:  (a) PBGC premiums, to ensure the plan’s funded status will not trip a trigger to become a variable-rate PBGC premium payer, and (b) a discretionary plan contribution, which may make financial sense.  We examine both of these next.
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