Blockchain has come out of the laboratory and the distributed ledger technology has started being used in areas of financial services according to participants at an International Commodities and Derivatives Association conference.
Fredrik Voss, vice president, blockchain strategy at Nasdaq spoke on a panel at the ICDA Blockchain Conference in London yesterday and said a team of engineers at the US exchange had started working on distributed ledger technology two and a half years ago.
Last December the Nasdaq Linq blockchain ledger technology was used to complete and record a private securities transaction for Chain.com, the blockchain developer. Voss said this was the only legal representation of the shares, which could then be transferred to investors for secondary trading. Nasdaq said blockchain technology has the potential to shorten equities clearing and settlement from three days in the US to ten minutes, reducing settlement risk by more than 99%.
Voss added: “The reason we chose the private markets was because regulation is not complex and the level of current technology in that sector is limited. As we address more complex markets, we will be going into areas that current legislation has not contemplated.”
In February this year Nasdaq and the Republic of Estonia announced a blockchain-based e-voting pilot to allow shareholders of companies listed on the country’s regulated securities market, Nasdaq’s Tallinn Stock Exchange, to vote electronically in company meetings. The platform uses the e-Residency platform, an electronic identity authentication system, which allows residents and those with business interests in Estonia to access government services.
Kaspar Korjus, program director, e-Residency, said in a statement: “When we started the e-Residency project a year ago we knew we would change the way people think about nations and citizenship. Now, via our e-voting collaboration with Nasdaq, we will be revolutionizing corporate governance.”
Voss added: “We have a big bucket of things we are working on as there is phenomenal potential for distributed ledger technology in capital markets. We have learnt that it is important to put an application on top of the ledger that allows human users to easily understand the information.”
Ewout Huizingh, project manager at ABN Amro Clearing Bank, said on the panel: “In our firm blockchain has come out of the lab in trade finance and there are similar archaic processes in the over-the-counter derivatives market.”
Huizingh said ABN Amro was closely watching the announcement in January from ASX that it had selected US-based Digital Asset Holdings to investigate developing distributed ledger technology for the Australian exchange group. In February last year ASX had said it would replace or upgrade all of its main trading and post-trade platforms, including Chess, the clearing and settlement system for the cash equities market. A final decision on Australia’s post-trade technology will be made next year.
ASX said in a statement: “The standards that apply to regulated financial markets mean that the design of a solution will differ from the publicly available blockchain. The architecture will be based on a private network whereby all parties that participate will be permissioned to do so – as they are today when they connect to Chess.”
Angus Scott, director of product strategy and innovation at Euroclear, said the central securities depository was exploring how blockchain could be used to simplify settlement.
“We are looking at how blockchain fits in the legal structure and how to represent asset ownership,” added Scott. “There also needs to be a link between movement on the ledger and the real asset, and a definition of settlement finality.”
Hirander Misra, founder and chief executive of exchange operator GMEX Group, said at the conference that blockchain had moved from hype to real use cases. He cited the announcement last month from Icap, the post-trade risk mitigation and information services provider, that it had successfully completed a proof of technology test case for a distributed ledger using blockchain technology.
Icap said its post-trade risk and information division imported matched messages from Harmony, the multi-asset messaging and matching network, and converted them in real-time to blockchain-based smart contracts to test bilaterally executed spot/forward foreign exchange block trades. The smart contracts were distributed to nine representative participant nodes on the blockchain infrastructure provided by New York-based Axoni, and trades were permissioned for additional services such as valuation, compression and reporting.
Barclays, the UK bank, said in a statement yesterday that for the first time its Accelerator programme for fintech had included an internal team from the investment bank. The Barclays internal team produced a blockchain-inspired prototype to create financial trades that run as smart contracts.
The statement said: “Barclays ‘Smart Contract Templates’ prototype is the first public demonstration of an application using the R3 consortium’s Corda distributed ledger platform.”
Misra added: “We could end up with lots of different blockchains and no interoperability but after the initial fragmentation about 90% of companies will fail.”
Eric Benz, co-founder and chief operating officer of Credits, which builds blockchain infrastructure, said at the ICDA conference that over the next two years there will a numbers of chains and no clear winner.
Benz said: “There will still be a role for central securities depositaries and central clearers and they have a big opportunity to provide other services.”
Featured image via Unsplash
<