Major Banks Turn to Blockchain


Just a few years ago it would have been completely unthinkable that some of the largest foreign exchange and currency dealers by market share would even entertain the idea of settling even a small proportion of their trades in cryptocurrency.

Back at the beginning of the second decade of this Millennium, cryptocurrency was in its infancy and there was a distinct ‘them and us’ divide between the traditional Tier 1 banks and what were seen at the time as rebellious mavericks who sought to attempt to disrupt the established financial system by circumventing it with some non-existent peer-to-peer ‘coins’.

The boardrooms of the large banks of Wall Street and Canary Wharf were calm, free from any discussion about Bitcoin, whereas the Bitcoin advocates were active, almost angry and held loud and proud debates from parapets in an almost proseletyzing fashion, terming the suit wearing executives in the towers that adorn the side of the River Thames and light up downtown Manhattan as ‘banksters’ that need to be shown a revolution.

The banks considered this to be implausible, whereas the crypto advocates saw the banks as targets.

Who would have thought that one day, not too long after this, the two would be almost completely reliant on each other for the forging of a new, high tech digital economy?

That day is now.

Some of the major Tier 1 banks which are at the top of the market share league table for currency dealing at interbank level have agreed to begin to settle currency trades over blockchain technology.

This is not just a leap forward, it is game changing because it will cut out a massive part of the Forex market’s trading infrastructure from some trades as blockchain technology is intrinsically designed to democratize transactions and remove the need for so many intermediaries.

Currently, the way that Tier 1 banks settle currency trades is based on legacy technology and involves the use of what are referred to as ‘single dealer platforms’. These single dealer platforms are software used by investment banks dealing in the capital markets to deliver trading and associated services via the web. In this type of trading environment, traders who are employed by the banks open, close, and manage market positions through a financial intermediary.

Many of these single dealer platforms are as old as the hills, largely because banks are afraid to revolutionize the technology they use and build new releases on top of old legacy systems, therefore the traditional method of trade execution and settlement has been in place ever since the dawn of electronic trading some fifty years ago.

All trades rely on a company called CLS, and in London, LCH.Clearnet for trade settlement. CLS Bank operates as a limited purpose bank for settling Forex, and is based in New York with its main operations in London and pays out the bought currency only if the sold currency is received. In effect, CLS acts as a trusted third party in the settlement process and is therefore a de facto intermediary that is involved in all settlement for all currency trades worldwide.

As of this week, two banks, those being HSBC and Wells Fargo, will begin using blockchain technology to reconcile and pay out on trades in dollars, British Pounds, Euros and Canadian dollars between the two banks, using HSBC’s FX Everywhere platform.

This now means that after over 20 years of using CLS, these two banks will now bypass CLS, the entity that central banks urge market participants to use to neutralise the risk of certain trade failures.

Therefore, this is a major step forward for the institutional use of blockchain and represents a milestone in the life cycle of blockchain technology and its intended purpose of removing the ‘middle man’ from important transactions.

If this is a success and reduces the cost and increases efficiency, other banks will likely follow, and once the entire currency trading ecosystem is on the blockchain, who knows what other cryptocurrency related enterprises the Tier 1 interbank dealers will delve into.

We are now living well and truly in the age in which cryptocurrency leads the way forward for the entire world’s financial system.