Eleven big banks test blockchain-based trading system

[January 20, 2016]  By Jemima Kelly

LONDON (Reuters) - Eleven major banks, including Barclays, UBS and HSBC, said on Wednesday they had tested a system that could make trading much faster and cheaper, using the technology that underpins crypto-currency bitcoin.

The banks are part of a consortium of 42 major lenders, brought together last year by New York-based software company R3 to work on ways blockchain technology could be used in financial markets - the first time so many have collaborated on using such systems.

A blockchain is a huge, decentralized ledger of every bitcoin transaction, verified and shared by a global computer network, that can also be used to secure and validate any exchange of data, including real assets, such as commodities or currencies.

Banks reckon the technology could save them money by cutting out middlemen and making their operations more transparent. But analysts caution it is early days - bitcoin was invented just six years ago and blockchain experiments are still under way.

For this test, R3 used a Microsoft platform, which runs on a blockchain built by distributed ledger company Ethereum.

The 11 banks in the simulation, operating across four continents, each used their own computer, or "node", and transferred "Ether" to each other - Ethereum's equivalent of bitcoin, R3 said.

They were able to settle the transactions almost instantaneously, it added. That compares to settlement times of days or even weeks, depending on the asset class, under the current systems used by banks.

R3 Managing Director Charley Cooper said the technology could be used by banks to transfer real assets within the next one or two years.

"Rather than just talking about what we might do, we've moved into a new phase, which is actually executing these plans and demonstrating how this technology might work in practice," said Tim Grant, who runs R3's test labs.

PEER-TO-PEER

The other eight banks involved in the experiment were BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, Natixis, Royal Bank of Scotland, TD Bank, UniCredit and Wells Fargo - all members of the R3 consortium.

"Proving the scale and peer-to-peer operation of blockchain experiments is an important next step," said UBS's senior innovation manager Alex Batlin, who is in charge of a blockchain lab for the bank in London.

R3 has recruited many heavyweights from the worlds of bitcoin and technology more broadly. Mike Hearn, a former lead bitcoin developer who last week said the crypto-currency had been a failed experiment, is its lead platform engineer.

Banks see potential in the so-called "smart contracts" that blockchain technology facilitates: agreements that are automatically executed when pre-determined conditions are met.

"Though ... there are still many implementation hurdles left to overcome, this exercise further validates the utility of smart contract consensus technology," a spokesman for Ethereum said.

(Reporting by Jemima Kelly; Editing by Andtre Heavens)

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