Westpac has become the latest Australian bank to join a global consortium developing a new blockchain framework for financial institutions.
The blockchain is the fundamental innovation behind bitcoin, eliminating the “double spend” problem by verifying transactions publicly, in multiple places.
Since being launched by fintech startup R3 in September with nine banks including the Commonwealth Bank, the banking consortium has grown to include industry heavyweights like UBS, Deutsche Bank, Goldman Sachs, HSBC and Societe Generale.
There are 43 banks in this consortium, with the National Australia Bank and Macquarie Bank rounding out the Australian members. The consortium is focusing on integrating the blockchain into global financial markets, creating new blockchain-backed exchanges and investing in startups.
ANZ has joined a different project by the Linux Foundation to create an open source blockchain framework.
The reason why banks are so eager to develop blockchain was explained in a recent speech by J. Christopher Giancarlo, commissioner of the American Commodity Futures Trading Commission.
Giancarlo highlighted the outmoded, slow and risky way banks currently settle with each other.
“At present, centralized third parties authenticate financial information in generally three-day settlement timeframes that add undue risk, cost and volatility to the marketplace,” said Giancarlo.
“The 2008 financial crisis revealed that a portion of the recordkeeping infrastructure of the multi-trillion dollar swaps market was recorded on handwritten tickets faxed nightly to the back offices of market counterparties.”
But it’s more than just speeding up the process and taking away risk. Using the blockchain, which would allow for peer-to-peer transactions that are verified publicly, removes the need for trust. When everyone can see who owns what and where it is going, there is no need for a third party to sit in the middle.
Among other things, this means faster clearance times, and a reduced need for paperwork and staff. Even more, it could allow for greater volumes of transactions – especially when linked to stock or currency trading.
“Unlike current settlement processes, distributed ledgers use open, decentralized, consensus-based authentication protocols,” said Giancarlo.
“They allow people who have no particular confidence in each other [to] collaborate without having to go through a neutral central authority.”
“Distributed ledgers will have enormous implications for financial markets in payments, banking, securities settlement, title recording, cyber security and the process of collateral management that is made infinitely more complex by new regulations.”
Although there is a lot of cross over between these different projects developing the blockchain – R3 is also contributing to the Linux Foundation’s project for example – there is also a lot of competition here. Just like the battle between alternating current and direct current, this is a competition to set the standards for a whole industry.
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