Investment bank HSBC Holdings is using a blockchain distributed ledger technology (DLT) to digitize transaction records of private investments, enabling clients globally to access the details of their assets online in near real-time.
The London-based company, the seventh largest bank in the world, plans to move $20 billion in assets that include equity, debt and real estate onto its new Digital Vault blockchain, a shift away from its current use of paper records to respond to client search requests.
“The Digital Vault is live in Asia and will be rolled out in the U.S. and Europe in the first quarter of 2020,” an HSBC spokesperson said via email.
By getting investors to interact with this data on the blockchain through decentralized applications (dApps) supported by friendly user interfaces, HSBC is helping build the on-ramps and infrastructure needed to take blockchain DLT mainstream, according to Avivah Litan, a Gartner vice president of research.
“Presumably, millions of potential investors and users will be on-ramped to blockchain interfaces and they likely won’t even be aware of the backend technology,” Litan said.
Digital Vault, developed by HSBC’s Securities Services unit (HSS), is expected to eventually handle the custody of additional digital asset classes, enabling the bank to move more of the asset transaction lifecycle onto the ledger in the future.
HSBC is hardly going into the blockchain project blind. The bank has been involved with enterprise DLT firm R3 since at least 2015, so it has had time to research and test various blockchain ideas, according to Michela Menting, digital security & blockchain research director at ABI Research.
R3, which began as a financial services consortium and is now governed by more than 70 partner firms, created the Corda open-source DLT platform. R3 claims Corda is not a blockchain platform because it lacks a consensus algorithm that allows participants to validate ledger entries. Like blockchain, Corda is a permissioned or private DLT platform that also enables the creation of dApps for various financial services uses; Corda uses the Java programming language for its dApps.
The use of Blockchain DLT will likely not only speed up HSBC’s processes significantly and cut costs related to “middlemen” who engage in the time-consuming process of paper records research, but it will also boost interest and engagement by the bank’s clients in securities trading, Menting said.
“This is important for a bank that wants to transform into a more nimble and flexible organization, especially with the increased competition from FinTechs,” Menting said.
Stephen Bayly, HSBC’s CIO for Securities Services, said the bank is responding to clients who have been requesting real-time visibility into their private transactions so they know when they will receive the coupon on a private debt transaction or to facilitate a records audit.
“Private assets are prime candidates for digitization and we see this platform as a key step on the journey as the model evolves,” Bayly said in a statement. “We are preparing for the future, in which the full transaction lifecycle could be stored on a ledger, including issuing digital tokens instead of paper certificates.”
This year has seen several high profile projects using blockchain to convert assets into digital tokens, which can then be more easily purchased or traded domestically or across international borders. KPMG recently pointed to a wave of start-ups and established financial services firms, such as Fidelity Investments, launching various crypto products and services for the emerging tokenized economy. The firm suggested that a tokenized economy will likely be one of the more significant innovations enabled by cryptoassets like bitcoin, Litecoin and Ether.
Last month, JP Morgan, IBM, Intel and Microsoft created a consortium to jointly develop a blockchain-based token specification that would enable regulatory-compliant digital currency.
HSBC’s deployment of a blockchain digital custody platform is significant for several reasons, including the amount of assets being entrusted to the electronic ledger, as it joins a quickly growing trend in the financial investment market, according Litan.
“Blockchain DLT provides a shared single version of the truth based on immutable data and audit trails, critical qualities in shared financial recordkeeping. This implementation should also prove that the technology can scale to support global bank performance and data confidentiality requirements,” Litan said.
Even as HSBC and other financial firms are increasing their use of blockchain, Boston-based State Street Bank reportedly slashed more than 100 blockchain-related developer positions in a move away from the technology.
State Street is by no means abandoning blockchain, but it is curtailing in-house development of the technology based on the Hyperledger open source platform. It now plans to focus more on creating digital assets such as tokenized stocks and bonds through cryptocurrencies, “rather than the heavy lifting work of re-plumbing front to back office with distributed ledger technology (DLT),” blockchain industry publication CoinDesk reported.
Blockchain is not middleware meant to tie into existing legacy systems, but there are methods for automating the flow of data from ERP systems to blockchain networks. Those ERP systems or databases that contain corporate data are known as “oracles.” The flow of data between oracles and blockchain ledgers is automated by smart contracts, a business automation software that runs on top of the distributed ledger.
To create its own blockchain digital ledger, HSBC must have done a lot of “heavy lifting,” given the technology and its supporting middleware components that connect to legacy systems, are still “relatively immature,” Litan said.
Copyright © 2019 IDG Communications, Inc.