Blockchain Love: Big Banks are Relying on the Blockchain for Trade-Data Tests

One of the biggest blockchain applications not related to bitcoin is undergoing some serious tests. This week, a group of banks announced they are testing a solution that leverages blockchain technologies for validating reference data in financial trades. The early adopters includes sme of the biggest names in teh banking industry including Citigroup Inc, Credit Suisse AG and HSBC Holdings PLC.

Reference data is one of the most important aspects of trade settlements. In equity or bond trading, trade settlements can take an average of several days to complete. Banks have long expressed interested in the blockchain as a potential solution to reduce the settlement times to a few hours. Validating reference data is an incredibly important step towards that goal.

Saving Big Money with the Blockchain

The process of validating reference data in near-real time will translate into big savings for banks. In a typical or bond trade, banks maintain reference data in their own databases which causes a lot of challenges in terms of data reconciliation. Additionally, banks contract third parties such as Bloomberg to host and access the data produced in the trade process. Some recent studies estimate the costs associated with the validation of trade reference data to be about $2 billion annually.

Using the blockchain, banks can now host individual nodels of a blockchain network that stores reference data related to a trade in a secure way that can be verified by the other parties involved in the trade without the need of a centralized authority. Based on the initial reports, banks have been developing a pilot solution to validate reference data in bond trades. Some of the reference information include elements such as interest payment rates of issuer name.

Big Win for Consortium Blokkchains

The trade settlement pilot, represents a big win for the consortium blockchain model. Often the ignored child in the public vs. private blockchain debate, consortium blockchains advocate a model for a blockchain network in which nodes are hosted by the different entities involved in a B2B transaction. From that perspective, consortium blockchains can be considered a middle-ground between public and private blockchains.

For years, Bitcoin-Blockchain purists have been vocal against consortium blockchain architectures claiming that it undermines some of the original promises of bitcoin. Beyond the philosophical argument, even the purest bitcoin advocates should acknowledge the great milestone that represent for those big banks to embrace blockchain technologies in such a mission critical solution. In addition to trade settlement, consortium blockchains represents a viable model for many well-known B2B scenarios such as supply chain, ecommerce, etc.

What Does this Means for Blockchain Startups

The technology used for the blockchain trade settlement solution was originally developed by blockchain startup Axoni. Beyond the great validation for Axoni’s technology, this pilot can be taken as a positive development for the blockchain startup ecosystem in general. For starters, the Axoni-powered solution represents a confirmation for the viability of blockchain technologies in the financial industry. In addition to trade settlement, other financial service scenarios such as lending or credit could soon adopt blockchain technologies.

In addition to startups, the bond trading blockchain pilot also represents encouraging news for investors in the blockchain technology ecosystem. Many of the banks included in the pilot have been active investor in blockchain startups. Hopefully, these news will drive more venture capitalists and corporate investors to actively invest in the blockchain ecosystem.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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