IBM and currency trading utility CLS on Monday announced a new platform that enables financial institutions to deploy, share and consume services on a hosted blockchain network.
Nine financial institutions, including Barclays and Citibank, have agreed to participate in the initial launch of the platform, which is sort of an app store for solutions that use distributed ledger technology, also known as “blockchain.”
The proof-of-concept venture, LedgerConnect, allows financial institutions to access such services as know-your-customer processes, sanctions screening, collateral management, and derivatives post-trade processing and reconciliation.
Baton Systems, Calypso, Copp Clark, IBM, MPhasis, OpenRisk, SynSwap and Persistent Systems are among the vendors that will offer services on LedgerConnect.
“LedgerConnect is part of CLS’ strategy to explore how we can provide safe and robust solutions that create efficiencies and reduce risk for a diverse range of firms operating in the financial markets,” said CLS Chief Strategy and Development Officer Alan Marquard.
“LedgerConnect is uniquely positioned as a blockchain marketplace for the financial services industry, which will accelerate innovation across the ecosystem with value-added services for blockchain networks,” said IBM Blockchain Manager Marie Wieck.
Banks need to learn about blockchain, and LedgerConnect could be the vehicle to do that, noted Christian Ferri, CEO ofBlockStar, a blockchain holding company in San Francisco.
“Most of these banks operate in silos,” he told the E-Commerce Times. “Having an apps store, regardless of whether they use it or not, gives them an opportunity to see the breadth of what’s available to them.”
Blockchain won’t give a financial institution much additional functionality, according to Arran Stewart, chief visionary officer at Job.com, a blockchain powered recruitment platform.
However, “distributed ledger technology can offer increased speed and more trust,” he told the E-Commerce Times.
Blockchain usage is expected to accelerate transactions for financial institutions.
“They can cut down on their costs if transaction times are faster,” Hermann Finnbjrnsson, CEO of Svandis, a crypto-asset analytics firm based in Estonia, told the E-Commerce Times.
Ambivalence Toward Blockchain
Financial institutions have ambivalent feelings about blockchain, maintained Eiland Glover, CEO of Kowala, an autonomously stabilized cryptocurrency based in the Cayman Islands.
“They’re very wary,” he told the E-Commerce Times. “They’re scared of blockchain because it threatens to disintermediate them and threaten all their business lines.”
For example, banks make money collecting credit card fees from retailers and consumers.
“With credit cards, blockchain would alleviate the need for middlemen like banks and transaction-processing vendors,” Jim McGregor, principal analyst at Tirias Research, told the E-Commerce Times. Tirias, a high-tech research and advisory firm, has analysts in Austin, Texas; Phoenix; and San Jose, California.
Blockchain can be very enticing to the financial sector, remarked Kowala’s Glover.
“You can get lots of efficiencies with it,” he said. “You can send money and settle transactions very quickly and inexpensively around the world.”
With LedgerConnect, IBM and CLS hope to spur adoption of blockchain in an industry that has many players still operating with decades-old legacy systems.
“When you’re dealing with billions and trillions of dollars of assets flowing across your system, you’re reluctant to get into systems that are not well vetted,” Shone Anstey, executive chairman of Blockchain Intelligence Group, told the E-Commerce Times. Vancouver-based Blockchain Intelligence Group is a developer of a forensic search and analytics engine for tracking and monitoring cryptocurrency transactions.
Middle-level managers are supposed to vet these things, but they’re really risk-averse, noted Kowala’s Glover.
“They don’t want to be the tip of the spear,” he said. “They don’t want to do anything radically new.”
For those managers, IBM’s halo can be a source of strength.
“IBM is blessing these apps, so there’s less chance of them getting fired if something goes wrong,” Glover observed.
Forming an Ecosystem
For developers of blockchain financial services apps, LedgerConnect could be a boon.
“It creates a one-stop shop where people can compare different offerings, as you would in an apps store,” said Glover. “It bridges the gaps between the non-entrepreneurial nature of financial institutions and some of us out here who are creating solutions that they may be able to take advantage of.”
LedgerConnect also could give smaller developers an opportunity to get their apps in front of big players.
“Small vendors have a hard time pitching to big banks,” BlockStar’s Ferri said. “If you’re a Wells Fargo or J. P. Morgan and you’re dealing with a five-person startup, it can be a very difficult conversation.”
Standards created for apps sold through LedgerConnect can be beneficial to developers, too.
“Unified standards can be quite useful for a lot of startups that have limited funds and need immediate exposure to the banks on this LedgerConnect system,” Blockchain Intelligence Group’s Anstey observed.
One drawback of LedgerConnect to the blockchain community is that it’s a walled garden. “It’s a private network so you have a permission environment,” Glover noted. “There are advantages to that for financial services institutions, but there are disadvanatages, too. Because everything is centralized, you lose some of the benefits of the decentralization that comes with blockchain.”
LedgerConnect also could address some problems with the existing blockchain scheme of things, such as the inability of various systems to talk to each other.
“Now you not only have different blockchains, but you have different software protocols for the different blockchains,” Glover pointed out.
“You need a way to take these disparate blockchains and the services that run on top of them and let them communicate with each other,” he said. “We don’t know all the details about IBM’s approach, but it will have to work on that bridging between blockchains.”
That will call for creation of a standard — just as a standard was created to allow numerous devices running different operating systems made by many manufacturers to connect to the Internet.
If IBM created such a standard, it would be competing with others in the marketplace, but it would have an advantage over them.
“If IBM’s standard got mainstream adoption inside the financial services industry, that would make it very powerful,” Glover said.
Having IBM, CLS and banks like Barclays and Citi should polish the image of the blockchain industry.
“It gives the entire industry more credibility, because you have these large players taking part,” Glover said.
“We need legitimacy in blockchain right now. Having a big brand like IBM come in with CLS to create this ecosystem is a big thumbs up for blockchain,” said Ferri.
“A rising tide lifts all ships, so a rising tide of blockchain adoption rises all blockchain technologies,” Svandis’ Finnbjrnsson said. “It’s a very public win and public statement for blockchain.”