JPMorgan Chase has begun a trial project using blockchain as it seeks to lead banking-industry efforts to cut the cost and hassle of trading.
The move by JPMorgan, the biggest US bank by assets, is among the clearest statements yet of banks’ determination to explore the potential of blockchain, the computer network on which bitcoin sits.
The bank is collaborating with Digital Asset Holdings, the New York-based start-up run by Blythe Masters, the bank’s former head of commodities. The pair are looking at several applications for the technology, including addressing liquidity mismatches in JPMorgan’s loan funds, which normally let investors take out their money at short notice — even though the underlying assets can require much more time to sell.
“To sell a loan is a very cumbersome, time-consuming process; settlement can take weeks,” said Daniel Pinto, head of JPMorgan’s investment bank. Exploring alternatives through blockchain “makes all the sense in the world; it’s easier and faster operationally, and you get fewer mistakes”.
Blockchain has caught the imagination of the financial services industry within the past year, with a host of companies vowing to find ways to use it to reshape many of their daily operations, from upgrading old back-office systems to automatic execution of contracts.
The technology is essentially a digital public database of events that is continuously maintained and verified in “blocks” of records and shared among various parties. This means payment ledgers can be instantly updated in multiple locations without a single, centralised authority.
JPMorgan appears to be taking a lead in encouraging broader, industry-wide adoption of blockchain technology — in a similar way to how Goldman Sachs has led a consortium developing Symphony, a communications tool.
Officials at JPMorgan point to the bank’s involvement with the Linux Foundation’s Open Ledger Project, which said last month that it was aiming to create standards that the entire financial services industry could adopt.
Mr Pinto said loans were a good place to start trialing blockchain technology, because “the settlement process is complex with lots of manual intervention and multiple parties”.
A couple of months into the trial, the 52-year-old executive — among the leading candidates to succeed chief executive Jamie Dimon should he step down in the near-term — is pleased with progress.
“Blockchain will be big in everything related to settlement, and not just loans. While it is still early days, the technology looks very good,” he said.
Ms Masters noted that efforts to improve the speed of settlement led to “reduced capital requirements, lower operational costs and an improved client experience”. Previously, she had described reducing the costs of financial transactions as “one of the greatest challenges of our time”.
Last week Digital Asset Holdings announced it had raised more than $50m from a group of 13 financial companies including JPMorgan, Citigroup, Deutsche Börse and the Depository Trust & Clearing Corporation.
Goldman Sachs is now in discussions to join that latest round of funding, according to people familiar with the situation.
Autonomous Research, a New York-based financial services boutique, estimates that the global investment banks now spend about $50bn a year on post-trade processes, a figure that could be cut by about one-third with greater use of blockchain-type technologies.
“There has been endless innovation in the pre-trade world. But in the post-trade world, your trades are still going to a reconciliation clerk and they’re faxing it back and forth and three days later,” said Brian Foran, a partner at Autonomous.
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