Capital Markets Blockchains Are Finally Getting Go-Live Dates

FEATURE
Ian Allison
May 17, 2018 at 08:00 UTC  |  Updated  May 20, 2018 at 15:04 UTC

If minimum viable products (MVPs) have so far proved elusive for companies building blockchain solutions for capital markets, Consensus 2018 marked a notable change in the narrative.

Assembled in New York this week, a handful were even confident enough to give firm timetables for production. For those tired of blue-sky talk, it was refreshing to hear large-scale financial infrastructure projects discussed openly and frankly, in clear terms of where they are and when we can expect to see things going live.

"We are now starting to see at Consensus, examples of where financial services are taking this technology into production with real timelines that they have committed to," Chris Church, the head of business development at Digital Asset, said.

He told CoinDesk:

"I think that's a very important proof point for the industry."

Indeed, DA, a blockchain startup founded by former JP Morgan executive Blythe Masters, has itself been making headway with its overhaul of the Australian Securities Exchange's (ASX) Clearing House Electronic Sub-register System (CHESS).

Underscoring the seriousness of the undertaking, ASX recently produced an 87-page progress report. Roll-out is targeted for late 2020 or early 2021.

"A lot of people have talked about hype and reality," Church said. But with the ASX's commitment, at the end of last year, to replace CHESS with DA's technology, "we now have evidence that a systemically consequential, highly regulated, national market infrastructure has made the decision to take this technology  to put it into production for their marketplace."

Church stressed that this project is not simply "adding something on," but rather, taking out a chunk of the CHESS system and replacing it.

Looking ahead, Church said that DA is now working with a bunch of other financial market infrastructure providers, including exchange groups in all three major regions – Europe, North America and Asia/Pacific.

Though he wouldn't name names, Church indicated that these conversations were not about doing more proofs-of-concept.

"A science experiment is not what we are interested in," he said.

In the weeds 

But DA isn't the only company that's actually finally getting somewhere with DLT for financial market rails.

For example, the re-platforming of the DTCC's trade information warehouse is one of the highest profile financial infrastructure blockchain projects bitten off by anyone. Robert Palatnick, DTCC's chief technology architect, confirmed that coding is expected to finish at the end of this quarter; what will follow and take until year-end, is a complex process of integration, testing and data migration.

Palatnick told CoinDesk:

"It's exciting, but we are currently in the weeds and learning new and interesting things about working with this nascent technology as we progress."

He went on to explain that changing to a blockchain isn't a "magical flip of a switch." It involves a migration of all the data that is currently in the legacy system into the blockchain before anything can go live.

The enormity of such a project may not be obvious to those unfamiliar with the creaky plumbing of the capital markets.

"It's hard to explain how you connect to legacy systems, for example, if you don't have legacy systems," Palatnick said. "We don't have any benchmarks to compare to when it comes to blockchain, so while this is unchartered territory, we continue to be pleased with our progress."

In the third quarter of this year, DTCC expects user acceptance and the migration process to start in earnest, with an expectation of going live in next year's first quarter.

"We are comfortable we can meet that schedule," said Palatnick.

Drilling down a little, the very first phase involves running the ledger nodes inside of DTCC's environment. So firms will not be running nodes themselves in the first instance until the whole challenge of managing those nodes is understood.

At the completion of phase one, DTCC will have nodes set up internally for every firm that it knows will run one, plus some general nodes that will take care of supporting the transactions and processing for the firms that do not wish to support a node of their own.

For this project, DTCC has taken a multi-vendor approach. Ethereum-inspired startup Axoni is providing the technology, with IBM helping to manage the project, and R3 providing best practice guidance on areas like selecting the right data models.

'Changing a whole industry'

Meanwhile, in Europe, a blockchain project involving the Luxembourg Stock Exchange and a growing contingent of buy-side firms is now scheduled to go live in January 2019. Professional services firm KPMG picked the clearing and settlement of exchange-traded funds (ETFs) on the Luxembourg exchange as a use case for blockchain – which, it turns out, is a very big deal.

Luxembourg is the largest fund management hub outside of the U.S. The jurisdiction holds many trillions of dollars worth of assets under management.

"This is not just about changing the Luxembourg exchange – it's about changing a whole industry," Eamonn Maguire, a managing director in charge of advisory banking services at KPMG, told CoinDesk. "The primary netting point, if you will, for funds trading in Europe is Luxembourg."

Explaining the impetus for such a change, Maguire pointed out that the charging of commissions for the distribution of funds is going to end under the European Union's second Markets in Financial Infrastructure Directive (MiFID II). The hit to revenue means costs must be cut somewhere. 

As part of its response, Luxembourg is embracing a newer "fintech" approach using apps and mobile devices for direct-to-consumer distribution.

But combining this front-end revamp with blockchains in the back office will mean a roughly 60% reduction in costs for the exchange, said Maguire.

The KPMG-led project includes banks like BNP Paribas, Crédit Agricole and others, as well as over 400 asset managers. The technology used is ethereum-based Quorum, the popular open-source project run by JP Morgan.

KPMG found that Quorum in this private deployment was achieving a throughput of 800 transactions per second, and that would need to be ramped up for production, especially considering Luxembourg's direct-to-consumer funds-picking model.

Maguire is proud of the magnitude of the project, which started out as a kind of garage idea inside KPMG. He concluded:

"There are different strategies. Sometimes people go for something that's easier or smaller – but we are not doing that."

Light at end of tunnel image via Shutterstock.

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