Patent applications are surfacing for blockchain technology in foreign exchange, but that doesn't mean the technology known for bitcoin transactions will soon be applied to the world's largest over-the-counter market.
The proliferation of patents filed in the past two months by banks such as Goldman Sachs & Co. Inc. and Bank of America Corp. could be a way for them to take the lead in FX-related blockchain development. But sources said it could also be a marketing attempt or a way to establish the use of the technology at those firms internally.
“It's tough to assign end motives for them, to find what tech applications they need for their business process,” said Terry Roche, principal and head of fintech research at TABB Group, New York. “Finding something truly inventive or novel will be a robust challenge. It's not time yet to get too excited about it.”
Still, the potential cost savings from applying blockchain to FX as well as trading and settlement of other securities is large, Mr. Roche said. About $85 billion is being spent now in the financial industry on technology, he said, “and of that, $4 billion in the post-trade world — headcount, licenses, hard assets” — could be eliminated through use of blockchain technology.
“Exactly how much will be saved overall is still uncertain,” Mr. Roche said. “But the benefits will be seen more in the consumer world as all financial functions eventually become fully automated through cloud-based systems, blockchain and the Internet of things.”
FX is a good place to begin a blockchain application, he said. “There are only a certain number of currency pairings, a certain number of ways to trade them. FX is a core way of transferring funds ... it won't be a big bang where all kinds of securities will trade this way; it will be small steps.”
About 60 patents were filed for blockchain-related products in the past year, said Hu Liang, State Street Corp. senior managing director and head of its emerging technologies center in San Francisco. “There have been all kinds of blockchain-related patents since 2014, things all over the place,” he said. “Anything from moving coin around to things similar to Amazon (Corp.)'s one-click shopping. But filing is one thing. Their ultimate value is something we're not seeing panning out. There's not one out there that makes us say, "Holy cow, that gives them a competitive advantage.'”
State Street is a member of a consortium working on blockchain development with cryptofinance firm R3CEV that completed a blockchain connectivity test this year, although it was not directly applied to FX.
The problems with blockchain in FX have not been resolved, sources said — issues related to speed, security and volume. Benedict Nielsen, co-founder and head of services at Nimbrix, a London-based financial technology startup that began operations Nov. 1, said the transfer of value through the blockchain is one unresolved issue. “Blockchain is not ready to do that,” said Mr. Nielsen, instead saying the use of blockchain as a shared registry, or for transfer of title, is more advanced.
Also, all participants in FX reconciliation via blockchain, as with other securities, can only work if those doing trades are linked through the same technology. “Not everyone is there,” he said. “It works if everyone's in the digital world, but only if all parties accept digital.”
The patents that have been filed directly related to FX use of blockchain are more proprietary in nature, and not a case of one company trying to build a better mousetrap, said Joan Warner, managing editor of thought leadership at Oxford Economics, a New York-based data quantitative analytics firm. “Unlike VHS (vs. Beta), blockchain has to be proprietary. The kinds of blockchain being patented are private blockchains with carefully vetted, trusted partnerships. You can't have a public blockchain for FX transactions, simply because the bad guys will get involved.”
Ms. Warner said she believes “there will be lots and lots of blockchains. They won't compete with each other. Goldman Sachs, Bank of America, all need to figure out the mystery of FX. ... The problem is how they make money from FX. It's not straightforward like if you're Wal-Mart and you're selling in Mexico, which means you need to exchange pesos for dollars and vice versa. To make money on FX, you buy low and sell high. You can't do that in a completely open market. It's the same issue with all uses of blockchain — am I creating a public or private ledger, and if it's private, who will be on it and why?”
Officials at Goldman Sachs did not return requests for details; Bank of America officials would not comment.
Beyond digital access, Nimbrix's Mr. Nielsen said the size of the FX market — and how quickly trades are executed — are further hindrances to use of the blockchain. “The other difficulty is that the FX market is much more huge and quicker than other markets,” he said. “Blockchain can't handle that speed. FX trades are made in milliseconds. It could take minutes to update and confirm FX on each block. It's not suitable for FX trades at the moment, but eventually it could become more applicable.”
What will make it more applicable, said TABB's Mr. Roche, is when the issues of how and who will establish blockchain standards for FX trading are resolved.
“Everyone in the tech industry has said there won't be one blockchain network, and in capital markets that's probably true,” Mr. Roche said. “But the same standards? I think they will need that. People are agnostic about what kind of flavor of blockchain is used, but at some point there has to be some sort of integration, a uniform fabric of blockchain technology ... Who will apply that? On the back end, there could be any number of things applied to this type of network, any number of services and opportunities to apply to the blockchain.”
Mr. Liang at State Street said the company's FX Connect Trade Services, which automates trade matching and confirmation, is applying elements of blockchain in an ultimate move toward full blockchain implementation. He said FX Connect has begun using a regulatory reporting component of blockchain technology “that tells us who sent something and who signed off on it,” making disclosure easier.
“That's just one value component of blockchain,” Mr. Liang said. Others are the distributed ledger technology that underpins blockchain, the different versions and applications for which blockchain can be used, and the ability to settle contracts via blockchain. “They all apply, but you can't just do them all at once,” he said. “But we wondered if we can apply the components separately, and started with the regulatory component. You don't need to jump into full-blown blockchain use.”
