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IBM, CLS plan financial services blockchain ecosystem

financial services

Today IBM and CLS announced a proof of concept ecosystem, LedgerConnect, targeted at the financial services industry. The project hasn’t yet launched but work started last year. CLS is a market infrastructure group. Its multi-currency cash settlement for the foreign exchange market is classified as ‘systemically important’ by US regulators. Less than two months ago CLS invested in R3, IBM’s main blockchain competitor.

The plan with LedgerConnect is for a single network to host multiple shared services. These include know your customer (KYC), sanctions screening, collateral management, market data, and derivatives post-trade processing and reconciliation. The aim is for participants to gain efficiencies and cost savings across asset classes.

The PoC involves nine financial institutions, including Citi and Barclays. Vendors include Baton Systems, Calypso, Copp Clark, MPhasis, OpenRisk, SynSwap and Persistent Systems. Baton recently participated in a Bank of England test.

The main benefit of Distributed Ledger Technologies (DLT) is a single source of truth. But for banks, there’s the advantage of creating a shared infrastructure that could radically reduce costs. CLS and IBM point out that it’s time-consuming if each vendor, bank or consortium has to operate its own DLT infrastructure for multiple services.

CLS role

For LedgerConnect, it seems CLS is planning to offer to host nodes. Specifically, the announcement said: “This allows financial institutions to focus on transforming business processes rather than creating multiple new blockchain applications, networks and services in silos that could lead to increased interoperability costs and complexity.”

CLS is jointly owned by financial institutions and the subsidiary which runs CLS settlement is already designated as systemically important. LedgerConnect is separate and not covered by that designation. However, if CLS hosts nodes for various banks, then you potentially have another set of concentration of systems. The question is whether the US regulators will be comfortable with that. This is especially so as one of the primary purposes of blockchain is to decentralize.

Keith Bear, VP of Financial Markets at IBM told Ledger Insights “LedgerConnect will initially host the applications on IBM Blockchain Platform and IBM Cloud on behalf of the banks. Subsequently we will also be able to support applications on-premise or on bank-specified cloud.”

The IBM and CLS relationship isn’t new. They worked together on another DLT solution CLSNet. That system covers trades that settle outside of the CLS settlement service and will launch in the coming weeks. It’s a bilateral payment netting solution. If company A owes company B $500k and company B owes company A $200k, it nets off the payments, so company A pays $300k.

The new LedgerConnect system is based on the IBM Blockchain Platform and Hyperledger Fabric technology. But the statement included the comment that “support for additional ledger technologies may be provided in the future, based on market demand and developments”. This combined with CLS’s recent investment in R3 implies incorporating Corda could be considered.

Commenting on LedgerConnect, Alan Marquard, Chief Strategy Officer, CLS said, “LedgerConnect is part of CLS’s strategy to explore how we can provide safe and robust solutions that create efficiencies and reduce risk for a diverse range of firms operating in the financial markets. We expect LedgerConnect to deliver enhanced efficiencies and economies of scale over single-purpose distributed ledger networks.”

IBM’s position

IBM is aggressive in the blockchain sector. It’s involved in major initiatives across numerous industry segments, but it’s made a smaller splash in finance outside of trade finance. In part that’s because more than forty financial institutions own R3.

“Together IBM and CLS have been early pioneers in advancing blockchain solutions for the financial services space,” said Marie Wieck, general manager, IBM Blockchain. “Building on the success of CLSNet and leveraging the strong relationship CLS has with the world’s leading financial institutions, LedgerConnect is uniquely positioned as a blockchain marketplace for the financial services industry, which will accelerate innovation across the ecosystem with value-added services for blockchain networks.”

Interoperability

One of the most interesting aspects will be how these different functions, from KYC to collateral management, interoperate with each other. R3 boasts that it’s interoperable out of the box. Hyperledger Fabric is a little trickier. As a result, sometimes integrations are done outside of the distributed ledger. Keith Bear commented: “The applications deployed on LedgerConnect run independently of one another but on a consistent IBM Blockchain Platform powered by Hyperledger Fabric. Over time, CLS may may incorporate services built on other frameworks, but for the time being there should not be interoperability challenges given the consistent framework.”

But it might not be a matter of technology. You could have the most interoperable technology, but if two systems aren’t designed to work with each, integrating them will be painful. And that seems to be the point of LedgerConnect.


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