The news, reported in the Financial Times, that nine major banks have formed a partnership to invest in and explore the potential for digital ledgers in wholesale financial market is game-changing stuff.
Chatsworth client, R3, has brought together some of the sharpest minds from across electronic financial markets, digital currencies and cryptology with the backing of banks including JPMorgan, Barclays, UBS and Credit Suisse.
The creation of digital currencies like Bitcoin have attracted considerable attention. But it is the distributed ledgers underlying these payment systems which look to be the significant innovation.
Distributed ledgers allow for the distribution, verification and record keeping of transaction information. As most financial assets today of course exist only as digital records, distributed ledgers could be applied to wholesale financial markets to transform the way records are kept, queries and reported.
There has been a feeding frenzy of interest and outside investment in applying the technologies developed to drive digital currencies to financial markets, but so far they all appear to lack understanding of the problems they hope to solve and an infatuation with immature technology for its own sake. The R3 project stands out as the first serious commitment by the banks to work towards a common understanding of how best apply this emerging technology to the global financial system.
Distributed ledger technologies may well transform financial markets but the technology and standards must be secure, scalable and adaptable. The R3 project includes a collaborative lab environment or “sandbox” to test and validate distributed ledger prototypes and protocols.
Success needs a highly scientific and methodical approach with understanding and careful analysis of the sector and the problems which need to be solved, before the development and deployment of a financial-grade shared ledger solution.
It is not just the number and size of banks and the scale of their investment which sets the R3 project apart. It is collegiate approach to defining what success looks like and then building it the right way.