A group of 40 major banks, including Goldman Sachs and Barclays, have tested a way to trade fixed income assets using the blockchain, the technology that underpins bitcoin, in a move that highlights how serious the world's biggest lenders are about the technology.
Financial technology firm R3 CEV, which brought together the banks last year to work on blockchain applications, announced the move Thursday.
Blockchain works like a huge, decentralized ledger for the digital currency bitcoin, recording every transaction and stores this information on a global network so it cannot be tampered with. However, most experts agree that the technology is not close to mass adoption and is still just in the trial phase.
The technology can be potentially be applied to wide array of uses and, for financial firms, some of the most interesting areas involve the clearing of trades. Experts say the blockchain will allow a large number of transactions to be settled in a matter of minutes or even seconds as well as being more secure, since each transaction is recorded and cannot be tampered with. At the moment, the process of settling some trades can take days.
Underpinning this is the idea of "smart contracts" — a computer code that would only execute when the terms of a contract are met. For example, a trade may be carried out once the money from the buyer has been received. This would all be done automatically and would not be up for dispute since it would be recorded in the blockchain.
For this trial, a number of distributed ledger companies worked with the banks — Chain, Eris Industries, Ethereum, IBM and Intel. The institutions did an assessment of each company's smart contract solution to trade fixed income.
"This development further supports R3's belief that close collaboration among global financial institutions and technology providers will create significant momentum behind the adoption of distributed ledger solutions across the industry," R3 CEO David Rutter said in a statement.
"These technologies represent a new frontier of innovation and will dramatically improve the way the financial services industry operates, in much the same way as the advent of electronic trading decades ago delivered huge advancements in efficiency, transparency, scalability and security."
Banks are not the only ones looking into the technology. Last month, Nasdaq used the blockchain to allow international residents of Estonia to vote in shareholder meetings even when they are abroad. Nasdaq also tested the blockchain for trading shares.