Financial firms to use blockchain technology in trade processes

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The world's largest financial companies, including Canada's major banks, are going to embrace blockchain technology to retool their post-trading processes for investors over the next decade, allowing them to complete securities trades more quickly and at a lower cost.

Blockchain specialist Blythe Masters, chief executive officer of New York-based Digital Asset Holdings LLC, told a Toronto conference Wednesday that computer technology originally designed to facilitate bitcoin transactions is the ideal platform to be adapted for use by mainstream financial institutions because it allows the tracking of complex transactions between a wide array of disparate players in the financial industry.

Ms. Masters, whose firm builds processing tools for financial services firms, said her clients are operating in such a low-margin environment that they cannot afford to keep running their inefficient, costly and often manual trade-clearing systems to complete securities transactions. Some trades take days or weeks to clear depending on the markets, she noted, because of the complexity of transactions and the diverse number of intermediaries working in the system.

"There used to be sufficient revenues in the system to make costs embedded in the post-trade system acceptable, but that's certainly not true now," she told the Ontario Securities Commission's annual Dialogue conference.

The world's largest financial services companies are using computer platforms that are about 20 years old, so are due for updating, she added, making it the right time to redesign the systems using blockchain technology. Blockchain provides technology to structure and share a digital ledger of financial data among different companies without needing a centralized manager of the system.

Investors may not see anything different from their end of transactions, she added, but they will benefit because all the steps needed to complete a trade and transfer securities can be done more quickly, at a cheaper cost.

"When spreads are wafer thin, it makes a big difference if you're losing 50 basis points per year on your savings," Ms. Masters said.

Rizwan Khalfan, who heads the digital and payments activities of Toronto-Dominion Bank, said blockchain technology is a "major trend" for the financial services sector, saying the technology will improve transactions such as trade settlement.

"We can simplify it with this transformational platform," he said.

Canada's major banks, including TD Bank, have joined a global network of financial institutions, called R3CEV, to help develop blockchain applications for their industry.

R3 chief executive officer David Rutter, who also spoke at the conference, said financial institutions currently operate many identical systems for processing transactions such as bond trades that are duplicative and add no value. Companies will use new technologies to transfer these expensive systems to the computing "cloud" and will share technologies to lower the expense.

The Bank of Canada is running an experiment with blockchain, working with Canada's five largest banks on a prototype wholesale interbank payment system based on its own digital currency, dubbed the CAD-Coin. Bank of Canada senior deputy governor Carolyn Wilkins told the OSC conference the experiment has been useful, and the bank will publish the results of its findings in the next few months.

She said the bank has learned lessons that would need to be addressed before digitalized central bank currency could become a reality that "could one day meet any of our regulatory requirements."

"What we did learn is that some issues with respect to data privacy, scalability, resiliency of the system and efficiency of the system with respect to collateral are things that really need to be worked on," she said.