Japan-based mega-corporations Fujitsu Limited, Fujitsu Laboratories Ltd., and Mizuho Bank Ltd., released a joint announcement yesterday, stating that they have completed a blockchain trial to streamline cross-border securities transaction settlements. Their aim is to create a whole new cross-border financial system that minimizes the risk of price fluctuations.
“The goal was to enable low-cost, low-risk cross-border securities transactions by building a system utilizing blockchain technology that can almost instantly share matched trade information in the post-trade process as data that cannot be tampered with, but without building a large-scale settlement system from scratch.”
Founded over 80 years ago, in 1935, under the name Fuji Telecommunications Equipment Manufacturing, Fujitsu Limited is the second oldest IT company, after IBM. The company has become a leading Japanese information and communication technology (ICT) company, offering a full range of technology products, solutions, and services.
The Tokyo-based giant reported consolidated revenues of 4.8 trillion yen (US$40 billion) for the fiscal year ending March 31, 2015, 60.4 percent of which comes from within Japan. The company employs 158,846 people and operates 121 data centers, supporting customers in more than 100 countries. Fortune's 2016 list of the World’s Most Admired Companies ranks Fujitsu sixth in the global IT services industry, and first in Japan.
Fujitsu Laboratories Ltd., the company’s Research and Development division, was established in 1962 and spun off as a wholly owned subsidiary of Fujitsu Limited in 1968.
Mizuho Bank is the fourth largest bank in Japan, according to the 2016 Bankers Almanac from global leading data provider Accuity. With total assets of US$1.343 trillion, the Bank ranks 22nd overall, with Industrial & Commercial Bank of China at the top of the list with $3.32 trillion in assets.
The three companies began their joint blockchain trial project in December 2015. Mizuho Bank contributed their expertise with the post-trade securities settlement process while Fujitsu Limited conducted the development, evaluation, and testing of the trial system. Meanwhile, Fujitsu Laboratories was responsible for applying blockchain technology.
“Using the blockchain Open Assets Protocol, the three companies built a blockchain-forming system in Fujitsu's cloud environment, recording the information from a confirmation (matched trade information: securities name, quantity of securities, currency code, amount, country of settlement, settlement type, settlement date) as one linked block.”
Open Assets is the most popular and well-supported ‘colored coins’ protocol today, used by many businesses, including NASDAQ. The American multinational financial services corporation is currently using it as part of their zero-day settlement platform (T-0) to trade private stocks on.
Employing the bitcoin blockchain, Open Assets is a decentralized way to assign real-world assets to tiny fractions of bitcoins, and share them online with almost no delays. The protocol can represent any type of asset, including stocks, all by simply marking and sending small bitcoin transactions.
Using the bitcoin blockchain offers major advantages over other blockchain alternatives, by virtue of being the most secure and widely distributed, but trade-offs do exist; it’s also the slowest blockchain for now, and the constant blocksize debate has highlighted fractures in the community.
Given that the information it carries can be shared trustlessly between multiple companies, the partners confirmed that they use the Open Assets protocol because it can shorten delays in the post-trade process. “We conducted the trial using public Bitcoin chains. However, at the moment, we have no definite plans on what approach will be applied to actual systems,” the companies told Brave New Coin.
The process of cross-border securities transactions is complex, and typically takes three days to complete. The longer the settlement time, the higher the risks faced by asset managers, such as price fluctuations and the possibility of counterparties going bankrupt.
The three companies hope blockchain technology can provide a practical solution for shortening settlement times, from three days to the same day, citing how past attempts to shorten them were impractical due to issues such as the large cost of system operations management.
According to a Global Payments 2015 report, by McKinsey & Company, cross-border payment inefficiencies are opening doors for new players, both banks and nonbanks. The report describes how domestic payments have migrated towards higher efficiency processes over the last several decades, meanwhile cross-border payments have changed very little. The back-end systems and processes that enable cross-border payments, like remittance networks and wire transfers, run on much the same infrastructure as they did decades ago.
“To date, banks have done little to improve the back-end systems and processes involved in cross-border payments. As a result, cross-border payments remain expensive for customers, who also face numerous pain points (e.g., lack of transparency and tracking, slow processing times).”
- McKinsey & Company
Mizuho is among few exceptions, having started multiple blockchain projects that could prove revolutionary to their business model. Yesterday’s announcement marks Mizuho’s third blockchain project announcement in less than a month.
Last Month, Mizuho Financial Group announced two blockchain projects. One was to develop a blockchain solution for secure record-keeping, and the other was a collaboration to use Microsoft Azure Blockchain as a Service for the company’s syndicated loan business - in collaboration with Information Services International-Dentsu (ISID) and CurrencyPort.
In addition, the Bank is also part of SWIFT's global payments innovation initiative to improve the customer experience in correspondent banking, by increasing the speed, transparency and predictability of cross-border payments.
“Mizuho Bank takes great pride in announcing that we will commit ourselves to achieving the goal of global payments innovation initiative. Together with SWIFT and SWIFT community, this initiative will make a significant contribution to enhance cross-border payments services, which will provide our customers with real benefits.”
- Yuji Tanaka, Mizuho Bank, Ltd. General Manager, Transaction Banking Coordination Division
The project was first announced in December 2015 and 45 banks had signed up to participate by January, including Mizuho. In the initiative’s documentations, SWIFT revealed that blockchain technology, in addition to other innovations, will be used to deploy new technologies: “Leveraging SWIFT’s Innotribe programme, the initiative will further engage the FinTech community, and explore the application of innovations such as real time payment status tracking, the use of peer-to-peer messaging and blockchain technology.”
Settlement and cash clearing services have been a core part of Mizuho Bank’s businesses. The Bank has approximately 2,000 overseas correspondents and maintains approximately 750 correspondent banks' accounts on their books.
“We provide cutting–edge solutions including cross–border settlement services for various emerging currencies, hedges against foreign exchange risk, issuing bonds for foreign trade, securitization of overseas accounts receivable, and trade finance ECA (export credit agencies) finance.”
Another blockchain trial project Mizuho has been involved in is with R3 CEV. On March 3, R3 announced that it had completed five cloud-based trials of blockchain technologies with 40 banking consortium members, Mizuho being among them. The test represented a situation where 40 of the world’s largest banks trade fixed income assets across a few shared blockchains, with multiple cloud technology providers, including Microsoft Azure.
Fujitsu has also been keeping abreast of blockchain technology. In December 2015, Fujitsu Limited joined other industry leaders in a collaborative effort to advance blockchain technology, led by the nonprofit technology trade association, The Linux Foundation. Fujitsu became one of the 30 founding members of the Linux Foundation’s Hyperledger Project.
"Blockchain is one technology that is sure to garner an enormous amount of attention for its potential as a disruptive force. Fujitsu is delighted to work through the open ledger project to contribute to the development of this technology."
- Takahito Tokita, Fujitsu Corporate Executive Officer SVP, Head of Financial Systems Unit, Integration Services Business
According to the statement put out by the three companies, the results obtained from this trial will be used to find a practical application of blockchain technology for cross-border securities transactions starting this month. With all of the different blockchain projects Mizuho is involved in, the technology could possibly be used for the Bank’s record keeping, trade settlements, syndicated loans and more.