By Jemima Kelly
LONDON (Reuters) - Electronic trading houses Citadel Securities and XTX have joined top global banks in signing up to blockchain currency settlement venture Cobalt, they said on Thursday, in what could be one of the first large-scale financial market uses of the technology.
London-based Cobalt, set up by two former bankers, wants to use blockchain, the underlying technology behind bitcoin, to reduce post-trade costs in currency trading, and to speed up the time in which transactions are settled.
It said it will go live with its spot currency trading system in the third quarter of this year.
Citadel and XTX Markets, both leading electronic market-makers, join a handful of top banks in committing to be clients of the system when it launches, though Cobalt declined to say what their financial commitment amounted to.
"We’ve got significant endorsement from two of the largest institutional FX trading participants in the market, who are leaders in technology," Adrian Patter, Cobalt's chairman and co-founder and a former foreign exchange trader at UBS and Deutsche Bank (DE:DBKGn), told Reuters.
Blockchain, also known as distributed ledger technology, works as a web-based transaction-processing and settlement system. It creates a "golden record" of any given set of data that is automatically replicated for all parties in a secure network, eliminating any need for third-party verification.
Post-trade processing costs banks tens of millions of dollars each year, so blockchain technology which is cheaper and quicker is attractive. But many people believe blockchain is still at least five to ten years away from large-scale adoption.
Foreign exchange trades currently need multiple records for buyer, seller, broker, clearer and third parties and then reconciliation across multiple systems, at a significant cost.
Patten said it could provide savings for banks and other market-makers like Citadel and XTX of as much as 80 percent on their post-trade spend.
"We are delighted to be part of the Cobalt initiative to reduce risk and cost in post-trade FX, and we look forward to working with them and other members of the network to transform the landscape," said Zar Amrolia, co-chief executive of XTX.
Top currency trading banks Citi, Deutsche Bank and UBS have all also committed to be clients, and BNP Paribas (PA:BNPP), Bank of America (NYSE:BAC) Merrill Lynch, Commerzbank (DE:CBKG) and Santander (MC:SAN) are finalising the paperwork that will make them clients too.
"Our goal is to be the ledger for the post-trade FX market. What we’re trying to do is to have a one-time reconciliation for FX transactions - a golden record - and post that transaction and cashflow information onto one distributed ledger," said Patten.
Cobalt has secured investment from Citi, venture capital firm Digital Currency Group and consultancy First Derivatives, though it declined to say how much.