Is the Forex market ready for the blockchain? Some banks do not think so



On July 27, the regulating power plant of the foreign currency exchange market (forex) CLS reported that it was in the final stages of testing its blockchain payment service for banks. However, while the service should be launched as soon as August, the number of players supporting the project has been halved by the initial announcement. Apparently, large financial institutions are not yet ready to deliver their data to a blockchain-based system.

Brief introduction to the forex and CLS system

Forex is a world market in which convertible currencies are traded and their conversion rates are determined Although decentralized, it is the largest and most liquid market in the world: April 2016, for example, trade averaged $ 5.1 trillion a day, according to data from the Bank for International Settlements (BIS). Given that forex is based on over-the-counter transactions, the major participants, ie international banks, endeavor to mitigate the settlement risk associated with their forex transactions.

Cue in Continuous Linked Settlement (CLS), a United Kingdom financial institution based on the Federal Bank of the United States as the first regulator and provides its customers with the thing that gamers need forex – settlement services that reduce risk. CLS minimizes the dangers through payment against payment agreements (PvP) – the process that ensures that a final transfer of a currency takes place only if there is also a permanent transfer of the other currency.

CLS was founded in 2002 and has been growing rapidly since, in July 2012, it officially became a systemically important utility for the financial market, which means that its interruption could destroy the US financial system as a whole. and, in March 2017, it managed over 50% of transactions worldwide. CLS members include more than 60 of the world's largest financial institutions, such as JPMorgan Chase, Barclays, Goldman Sachs and Citigroup.

The CLS relationship with blockchain, IBM and R3

CLS is not new to the concept of blockchain. He started the search for proofs-of-concept (PoCs) of ledger technology (DLP) in distributed registers (DLP) in 2015, when technology was in its early stages and the prospect of a mass adoption had just existed . In September 2016, the first CLS blockchain experiments were put under CLSNet, a network that essentially played the role of a sandbox for attempts with DLT to optimize the internal processes of CLS at the time. Made in collaboration with the IBM IT giant, it aimed to ensure intraday liquidity, enable real-time currency knowledge and reduce risks, among other objectives. At that time, CLS Netting would have allowed participants to send forex instructions for six products and 24 currencies.

In particular, CLS has been prudent not to put its main settlement system, long favored by major global financial institutions, on the blockchain – at least until it becomes completely tamper-proof and adoptable, from their point of view. The joint 2017 report submitted by CLS and IBM said:

"Based on the CLS-IBM collaboration, it seems that most banks will have to readjust their risk-based approach in terms of" go / no-go "decisions, especially In the early stages of a project As we have learned, organizations can design their first blockchain initiative to avoid significant risks. In CLS, our first decision was not to build a bridge too far or wide. initiative could not be where bankruptcy puts our existing business at risk. "

Likewise, in April 2017, Tom Zschach, information manager at CLS, explained to the International Business Times (IBT). ):

"The important thing about CLSNet is that it does not work It has nothing to do with liquidation or financing, it does not touch the accounts of our central bank, it does not access RT gateways GS [real time gross settlement]. What we are doing here is to introduce technology as a fundamental step in a step transformation. "

The joint CLS wi th IBM project relies on Hyperledger Fabric (version 1.0), an open source business blockchain framework hosted by the Linux Foundation, which companies have woven into their DLT-based ecosystem IBM seems confident about their collaborative work, as its vice president Keith Bear has declared to the IBT:

"Volume is an important consideration, but the technology is perfectly able to support the levels we are talking about in the case of CLS, even with Northern Trust and other ongoing projects at the moment. "

The collaboration between CLS and IBM also led to the creation of a separate PoC project called LedgerConnect, a so-called blockchain financial" app store "that shows DLT solutions created by fintech and software companies to help banks navigate through the labyrinth that is blockchain – at least for conventional commercial actors.

However, CLS does not limit its blockchain operations to the collaboration with IBM The forex giant also works with R3, a blockchain consortium of over 200 global financial companies , whose main goal is the creation of a DLT platform called Corda R3 could be considered a rival for IBM, at least in the field of blockchain.

Both R3 and IBM use Hyperledger Fabric for their blockchain efforts. in a comment for IBT, Charley Cooper – the CEO of R3 – stressed that Corda is written for Java, "the language of the bank he "in particular, while IBM tries to take a more general approach:

" The guys from IBM Fabric who donated it to Hyperledger are trying to solve a whole set of problems for a much broader set of industries : healthcare, self-financing, supply chain management, finance, etc. Considering that Corda was built specifically for financial institutions and built with financial institutions […] I think what CLS is doing is the right thing, in the sense that they are working with different suppliers, they are involved in the work of Hyperledger with Fabric, they are involved with the R3 consortium and work on projects that go beyond. "

In addition, CLS invested $ 5 million in R3 at the end of May 2018. Under the agreement, CLS also joined the R3 Board of Directors, so it would be fair to expect other DLT-based projects to introduced by CLS in the future.

But banks want to rely on blockchain for payments of settlements? [19659003AquantoparemoltedellegrandisocietàfinanziarieaffiliatealCLSsonoriluttantiaincorporareblockchainaquestopuntocomehadettoAlanMarquardChiefStrategyandDevelopmentOfficerdiCLSaFinancialNewsLondonIneffettilebanched'investimentohannocondivisopreoccupazioniriguardol'usodella"tecnologiaampiamentetestata"inpassatocitandolepreoccupazionisullaprivacyel'current"immaturity"dellaBlockchaintraleprincipaliragioni

Having this in mind, CLS had plans to offer members two ways to access CLSNet: directly and through the tried and tested old method: SWIFT, which is an interb messaging service 45 years old and a cooperative owned by about 11,000 member banks. As the company spokesperson confirmed to FN London:

"It was always the intention of CLS to launch the service in several phases: with the first phase, clients will rely on SWIFT connectivity for the inputs sent and received by CLSNet. service continues to grow with the functionality and adoption of the client, and the mature DLT, CLSNet will allow customers to host their own node. "

Marquard of CLS claimed that some banks were reluctant to join the blockchains in their optimized IT systems, mainly because of "security implications":

"You're not just installing software. [Banks] need to build operational knowledge and know-how."

Originally, when the settlement system powered by blockchain was announced in September 2016, the project was supported by 14 major institutions, including Bank of America, Bank of China – Hong Kong, HSBC and Morgan Stanley, among others. Other banks preferred the wait-and-see approach as Ram Komarraju, head of technology and innovation at CLS, said in Forbes in 2017:

"The journey has accelerated, we were building something for the first time and we started selling to big buy-side companies, some of them are attracted to cutting-edge technology, while others prefer to stay with existing systems and wait and see while we talked to the banks, we found out they are investing in blockchain, but they are not likely to actually use it, they are investing in several blockchain suppliers. "

However, now that the service is almost ready and should be launched by the end of the summer, about half of the 14 banks originally registered for CLSNet reported having withdrawn from the program – at this point, there are far fewer players who expect to join CLSNet once released ato. However, CLS could convince most banks to join later through efforts such as the above mentioned LedgerConnect and collaborations with organizations such as R3 – which, for example, brings together several law firms to educate lawyers globally in its efforts to Mass adoption of technology – constantly pushing global banks to exchange their traditional tools with new blockchains.


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