Bitcoin meets institutional FX settlement! ICAP to process FX trades using blockchain

British interdealer broker ICAP has been an advocate of the use of blockchain technology for processing FX trades for quite some time, having explained back in March this year that its Post Trade Risk and Information (“PTRI”) division has successfully completed a proof of technology test case for a distributed ledger using blockchain technology.

The proof of technology successfully completed on 26 February 2016 and has the potential to significantly transform post trade operations, while complying with new market practices within the post-crisis regulatory environment.

The PTRI distributed ledger proof of technology leveraged the multi asset messaging and matching Harmony network, and blockchain infrastructure provided by Axoni, a New York-based technology firm, to create a private, peer-to-peer, distributed ledger network using smart contracts. Axoni’s unique implementation of blockchain technology is proven to provide complex life cycle automation, transactional privacy, sufficient processing of trades to support high-volume markets, automated reporting, and a dynamic permissioning system to onboard new network participants.

Tested using bilaterally executed spot/forward foreign exchange block trades, the PTRI division imported matched messages from Harmony and converted them in real time to blockchain-based smart contracts. The smart contracts were then distributed to nine representative participant nodes on the blockchain network, where trades were permissioned for additional services such as valuation, compression and reporting.

The development and implementation of blockchain technology for the purposes of settling FX trades has been conducted by ICAP subsidiary Traiana, which specializes in post-trade settlement and began its operations in Tel Aviv before being purchased by ICAP in December 2007 for $247 million. Headquartered in London, the firm continues to retain an R&D center in Tel Aviv.

The UK-based ICAP will utilize its subsidiary ‘Traiana’ in collaboration with US-based technology firm Axoni. Traiana acts as a messaging hub for $2 trillion of forex, fixed income and swaps deals and is set to play a key role as the system makes a transition from reliance on traditional brokers to new digital market infrastructure.

“By the end of March clients will be able to access their own node on the blockchain. We create a digital record in a cloud vault and also on the blockchain,” said Jenny Knott, chief executive of post trade risk and information at ICAP, as quoted by FT. “We are building the Nex technology platform and licensing to the Traiana legal entity, so that we can run both systems in parallel. Over time we will be able to turn off the old system‎.”

Blockchain is a distributed database that maintains a continuously-growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block. By design blockchains are inherently resistant to modification of the data – once recorded, the data in a block cannot be altered retroactively.

The first blockchain was conceptualised by Satoshi Nakamoto in 2008 and implemented the following year as a core component of the digital currency bitcoin, where it serves as the public ledger for all transactions. Through the use of a peer-to-peer network and a distributed timestamping server a blockchain database is managed autonomously. The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem. The bitcoin design has been the inspiration for other applications.

This development by ICAP brings blockchain into the institutional FX world, therefore representing yet another instance in which Bitcoin, a virtual currency which is completely inseparable from its blockchain underpinnings, has been used in order to enter the exact world in which it set out to disrupt and circumvent.

Recently, blockchain development has been of great interest to large institutions such as PriceWaterhouseCoopers, Barclays, Goldman Sachs and JPMorgan, all of which have invested several million dollars in its development, demonstrating that Bitcoin has gone full circle from being the brainchild of mavericks and anarchists to the darling of the large institutions.