Blockchain, sometimes referred to as distributed ledger technology (DLT), has attracted a tremendous amount of attention and resources over the past couple of years. There have been many successful proofs of concept in financial services, and it’s exciting to see the beginnings of a shift from technology validation mode to commercialization.Nasdaq is excited to be at the forefront of these developments. We already have experience running successful projects and pilots with our implementation at the Nasdaq Private Market (NPM) and with the eVoting solution in Estonia. In addition, we’re now delivering products and market solutions based on blockchain technology.Here are just a few initiatives we’re involved in:
Nasdaq was selected to provide blockchain technology to the NYIAX. The advertising contracts exchange plans to move into production in 2017. In this very interesting project, trades and positions will be tracked in the blockchain ledger.
Nasdaq and Citi Treasury and Trade Solutions teamed up to offer a new integrated payment solution that enables straight-through payment processing and automates reconciliation by using a distributed ledger to record and transmit payment instructions. Several payment transactions have been concluded, including Citi’s automated processing of cross-border payments via a link between the CitiConnect for Blockchain connectivity platform and the Nasdaq DLT Issuance and Settlement Platform powered by the Nasdaq Financial Framework.
Nasdaq is collaborating with SIX using software from Chain, Nasdaq’s technology partner, to provide DLT for a Minimum Viable Product (MVP) for SIX’s OTC structured products business. The solution will integrate with several systems currently managed by SIX and utilize the blockchain capabilities at the core of the Nasdaq Financial Framework – Nasdaq’s next-generation enterprise architecture stack. With the MVP, SIX will gain first-hand experience implementing a blockchain-enhanced solution. It plans to investigate how to leverage blockchain technology in the post-trade environment.
Just recently, we launched a project with SEB to create a working prototype for a mutual fund issuance and settlement platform based on blockchain. The aim is to increase efficiency in the processing of purchases and sales of fund units including management of payments over blockchain. Today, fund unit ledgers are largely characterized by manual routines, long settlement cycles and paper-driven processes.
From Nasdaq’s perspective, there are many opportunities to utilize blockchain technology. For now, the capital markets industry is looking at pain points in the current infrastructure – where there are many intermediaries and manual processes – and figuring out whether blockchain can help solve them. In the near term, we see many commercial DLT installations will be for small or medium-sized use cases in specific asset classes where existing solutions are fragmented and labor intensive.
Instead of taking a “big bang” approach, many initiatives introduce a blockchain environment in parallel with the already existing environment, and subsequently migrate existing products and participants to the blockchain-based solution gradually. Nasdaq and SEB, for example, are launching the initial MVP that can scale to include more industry players, including fund companies and distributors. We have opened a channel for collaboration with additional interested parties on building a uniform market infrastructure for Sweden’s fund market.
The importance of security can’t be stressed enough. Although it wasn’t easy, Nasdaq built a fully security-hardened solution in a cloud environment. The cryptographic keys required for blockchain solutions are managed within hardware security modules (HSMs), so they never leave an isolated box, making it very tough to steal them.
We also recognize that security needs to be properly implemented so that transparency, resilience and scalability can be correctly managed where needed. The philosophy behind blockchain is that everyone should share data. In the bitcoin blockchain, everyone can see the parties to a transaction and the amounts transacted, so it’s fully transparent. However, it’s not scalable, and it takes a long time to process a transaction. Some blockchains have taken the approach where data is only shared between the two parties to a transaction, and there is a notary function in the middle that keeps track so no one can cheat.
In our view, the level of transparency in the blockchain depends on the use case. Chain architected a blockchain environment in which all assets, transactions and account details can be encrypted, and no one can see them without the right set of keys. Chain is also implementing a way to give unblinding keys to an auditor or a regulator, so they have access to transaction data where needed.
Given recent successes, no one is questioning whether blockchain technology works. Yet in our opinion, the real value will come when networks have been expanded to include an array of entities – from exchanges, clearinghouses, depositories and market participants to regulators and central banks – and viable operating models have been established. We’re looking forward to watching blockchain forge ahead, and we remain committed to this space.