RBC looks past Bitcoin’s flaws to consider blockchain strengths

Could the blockchain be the next technology to rock the financial sector? The Royal Bank of Canada (RBC) seems to think so – and it’s experimenting with the technology already.

Blockchain technology is the engine underpinning bitcoin, but it has been viewed separately from the cryptocurrency of late. Experts have begun to explore it as an independent technology for applications outside bitcoin. One of these is in finance and banking.

Adam Ludwin, founder of blockchain development company Chain, explained that while the company started off selling software development services to bitcoin companies, he has begun working with banks that want to use the underlying technology for their own purposes.

“They were interested in moving other assets the way that bitcoin moved,” he said. “This property of a digital asset that can be sent over the Internet and be settled quickly and have a record that transaction that’s immutable – that was appealing.”

Blockchain technology works by decentralizing everything. Instead of a central ledger, all participants in the network hold copies of a single distributed ledger, providing a single record that all can refer to. All transactions in the ledger are cryptographically verified to ensure that no one conducts a fraudulent trade.

In the bitcoin world, this enabled a network of anonymous participants to send funds to each other. In the world of banking, regulators typically want to know who is trading, and verify their identity. So organizations like Chain are working with banks to create custom blockchains, where the participants are authenticated.

Settling up

One application for blockchains in finance is faster settlements. Banks have traditionally managed transactions via their own digital ledgers, but they also frequently trade with each other. When they do, they need a way to settle the transactions recorded on their own ledgers between each other

If Bob buys shares in a company from Jane, then they make that agreement immediately. Before the trade can be resolved, though, someone has to make sure that Jane actually has the available shares, and that Bob has the money to pay. That happens at a clearing or settlement house, which settles all trades at the end of the day. The clearing house uses clearing banks that act as intermediaries during the transaction.

That’s not the end of the story, either. In many securities, such as stocks, the ownership of the asset must be registered with a central authority, known as a depository. It can take up to three days to complete all of these tasks after the initial trade is agreed, in what is known as a ‘T+3’ settlement window.

Blockchain technology can make that process instantaneous, which can reduce the amount of collateral that must be held during a settlement, while reducing the risk of a trade not being settled.

As interest in this technology mounts, companies are jockeying for position in what is seen as a potentially lucrative and sizeable market. One company making big strides is R3. It is working with 25 banks at last count, to create distributed ledger technology for them to use. CEO Charley Cooper said that the company has formed a working group with the banks to identify potential use cases.

“It’s been a year and a half of research, proofs of concept, conversations with various companies, and then the decision that the best way to do this was to build a consortium of banks to collaboratively deliver the best services to industry,” he said.

At the time of writing, two Canadian banks have partnered with R3: RBC and TD. Executives at RBC have previously talked about experimenting with blockchain technology by using it with a non-mission-critical currency. In RBC’s case, executives suggested a ‘safe’ currency, such as loyalty rewards points, although nothing is official yet.

“Blockchain ledgers have the potential to provide an immutable, transparent record of all transactions for a real or financial asset.  The encrypted and distributed nature of blockchain ledgers also have potential to provide additional security and business continuity,” said Carolyn Burke, vice president, regulatory, compliance and international, digital, payments and cards at RBC. “We are very interested in the use cases for integrating blockchain with internal systems and the external ecosystem and are actively working with partners to explore their viability.”

Many other companies are muscling in on the financial blockchain space. Digital Asset Holdings, Blockchain Clearing Consortium, and Symbiont are just a few. It will take a year or two for this highly-regulated industry to roll out the technology commercially, but it’s coming – and it could encourage interest from other sectors that also rely on exchanges between large numbers of companies, such as supply chain management, for example.




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Danny Bradbury
Danny Bradburyhttp://www.wordherder.net
Danny Bradbury is a technology journalist with over 20 years' experience writing about security, software development, and networking.

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