Cobalt DL “game changer” for FX
Andy Coyne, co-founder of Cobalt DL, said the firm’s distributed ledger technology provides an opportunity to change post-trade infrastructure in foreign exchange for the first time in decades and will prove a game changer.
The majority of settlement in the foreign exchange market takes place through the CLS, the bank-owned infrastructure. Coyne told Markets Media that Cobalt DL aims to cut 80% of costs through allowing more efficient management of trades though their life cycle before settlement using a distributed ledger.
“No-one has created a shared contract as each firm has their own ledger and multiple systems,” added Coyne. “We will be creating a single shared record for every foreign exchange trade.”
Examples of costs that can be reduced or eliminated by counterparties using the same trade details include affirmation matching, credit maintenance and monitoring and aggregation. In addition to cutting costs Cobalt DL intends to offer additional services such as multi-lateral compression and payment netting.
Coyle continued that Cobalt DL will cover all types of foreign exchange trades including spot, forward, non-deliverable forward and options – which transact trillions of dollars every day. Clients can choose how to integrate their own systems with Cobalt DL, which can then connect to CLS or another settlement system.
Cobalt DL said in a statement yesterday that Citi has become an investor and one of the launch clients. Coyne said the firm is in discussions and beta testing with other institutions and buyside clients will be able to join.
“A measure of success will be if significant counterparties use the distributed ledger,” he added. “The platform needs to reach critical mass so the largest players must see benefit over time and endorsements, such as Citi, are critical.”
Cobalt DL is set to launch next year with 15 institutional foreign exchange participants already committed to the service. Charlotte Crosswell, former chief executive of Nasdaq NLX has also joined as a strategic advisor to focus on strategic partnerships.
Crosswell said in a statement: “With continued scrutiny on efficiencies within the foreign exchange post-trade arena, I believe Cobalt DL is extremely well positioned to drive the changes we expect to see in this industry and deliver on real cost savings for market participants.”
Last month Blythe Masters, chief executive of fintech provider Digital Asset Holdings, said she is seeing all the things needed to happen now for blockchain and distributed ledger technology to be mainstream in five to 10 years.
Masters spoke at the Disruptive Technologies Forum 2016 in London in November hosted by DTCC, the US post-trade market infrastructure, and CSFI, the Centre for the Study of Financial Innovation.
“In the last eight to twelve months we have seen several things that have constituted a tipping point for distributed ledgers from speculative to real,” said Masters. “We have undergone a sea change from being evangelists to signing contracts with highly regulated systemically important organisations.”
Last month R3, the consortium of more than 70 financial institutions, also said it had made its Corda distributed ledger platform open source to allow regulated financial institutions to benefit from the sharing of information within blockchain systems.
There are other distributed ledger technologies being developed for business such as the Hyperledger Project hosted by the independent Linux Foundation, which has reached 100 active members. A blockchain from the Hyperledger project is being used by Deutsche Bundesbank, the German central bank, and Deutsche Börse, the German exchange operator, in a prototype for the settlement of securities.
In another blockchain initiative, CME Group and the Royal Mint, the 1,000-year old arm of the UK government which makes and distributes physical currencies, announced a partnership last month to allow gold trading on a blockchain next year. Next year the firm will launch Royal Mint Gold with the CME, which will record ownership of the physical gold in its vaults on a blockchain so that digitized tokens can be traded electronically.
The nascent asset class will benefit from more liquidity and regulation.
Clients can test their blockchain hypotheses in a rapid prototyping environment.
The startup plans to use the funding for further deployment of its DLT platform.
The pair will begin with the Sukuk securities.
The Australian Securities Exchange is replacing its equities clearing and settlement system.