Swiss Finance Industry Consortium to Bring OTC Equities onto Ethereum Blockchain

Blockchain technology moving into the financial sector has proven to be a beneficial and lucrative move.

Leading a consortium of 45 companies in research and development (of blockchain usage within the Fintech sector) was a wise move by R3, the blockchain tech company. Moreover, blending technology with finances redacts human error and lowers the risk to all parties involved.

Recently, a project led by IFZ/ Lucerne University of Applied Sciences and Arts utilizing the Ethereum blockchain has come forward with a consortium of their own in the Swiss sector to bring OTC equities onto the Ethereum Blockchain.

Mathias Bucher, Project Manager of this effort, wrote on Reddit

OTC Equities are traded “over-the-counter”, i.e., not via a Market Exchange. As a consequence, trade reconciliation can require substantial effort. Trade clearing and –settlement is typically slow, costly, and can involve substantial risks for the involved parties.

Blockchain Technology holds the promise to provide a remedy here by allowing instantaneous clearing and settlement, and by removing the need for error-prone reconciliation.

However, a couple of challenges need to be overcome if such a blockchain-based system should see wide adoption:

  • First of all, client data (data about the “economic beneficiary” of a transaction) needs to be kept safe during the transaction. At the same time, the system must be able to selectively reveal client information to regulatory authorities in cases of justified suspicion of criminal activities.

  • Second, the trade data itself (which is fully visible on the blockchain by default) needs to be obfuscated to the point where competitors cannot gain undue advantage by data-snooping.

  • Third, adequate governance rules for the consortium need to be formulated via Smart Contracts. As there is no central authority orchestrating the governance, this means the creation of a “Decentralized Autonomous Organization” (DAO) to take up this role.

A couple of initiatives are on the way to unlock the potential of the Blockchain for financial institutions, most prominently maybe “R3”. Instead of waiting for the outcome of these initiatives, a couple of high profile Swiss companies decided to move forward. They created a consortium for a research project under the lead of IFZ/ Lucerne University of Applied Sciences and Arts. The project is supported by the Commission for Technology and Innovation in Switzerland. Target of the project is to create a Blockchain-based system prototype that will be able to showcase real-life OTC equity clearing, settlement and reporting. If the prototype is successful, it is planned to roll out the system to other asset classes like OTC Derivatives or OTC Structured Products, and to enable trade execution directly on the blockchain. The resulting system will be open for all financial institutions who want to join.

The consortium is well set up for both impact and speed: Forward-thinking heavy-weights participate withSwisscom (Switzerland’s largest Telco Company), SIX (the Swiss Market Exchange operator), and Zürcher Kantonalbank (Switzerland’s 3rd largest bank), but also do the young and innovative companies ti&mInventxand Incore Bank. Hence, the consortium combines market experience, developer know-how and an excellent IT-infrastructure.

An important aspect of the project is of course the Blockchain technology that is used. “After a thorough assessment of the Blockchain platforms available today, we decided to go with Ethereum, and more specifically, with Ethcore’s Parity client” says project manager Dr. Mathias Bucher. “The functionality of Ethereum, and its developer eco-system creates a very robust base for what we are going to do. Parity’s efficiency and private chain capabilities are ideal for usage in a consortium context.” Ethcore’s developer team will also advise the consortium on the protocol level.

Until the end of the year, the consortium wants to have a first version of the system ready for testing and user feedback.

Click here to read their press release (in German).