Bank pilot shows interoperability between blockchains
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Coupling blockchain systems is a breakthrough that will bring with it improved efficiency and ease of use, but for now it is a benefit for bank treasuries alone. Bill Lumley reports.
Bank consortium Fnality, together with fintech company HQLAX, have completed a pilot of cross-chain repo swaps across Corda and Enterprise Ethereum, paving the way for settlement of intraday transactions using distributed ledger technology (DLT).
The pilot was completed by consortium members Santander, Goldman Sachs and UBS, with the proof of concept achieved by connecting HQLAX with a ‘testnet’ environment, used to simulate the Fnality payment system. Fnality, founded in 2019, aims to create a network of distributed financial market infrastructures using blockchain to deliver means of payment for wholesale banking markets.
In a statement, Amar Amlani, head of EMEA digital assets at Goldman Sachs, said: “Efficient cross-chain settlement is going to be fundamental to the scalable development of TradFi on DLT whilst enabling firms to realise the full potential of this innovative technology.”
According to Fnality, this marks the success of the latest stage of its delivery versus payment (DvP) mission, which aims to provide its participants with a single pool of liquidity to facilitate payments, cross-currency payments (PvP) and DvP use cases.
Establishing a connection
Rhomaios Ram, CEO of Fnality International, says the development has resulted in interoperability between two different types of DLT. “This DvP [proof of concept] is a significant step for Fnality as we enable a single pool of liquidity for our participants. Coupled with PvP, participants can swap their funds from their home currency to execute a DvP settlement with other platforms and business applications. Leveraging the strengths of each platform and ensuring they operate seamlessly is [...] exciting to see.”
Mr Ram adds that this compatibility between blockchain systems is able to deliver the operational efficiencies promised by DLT, and that “importantly, HQLAX, Fnality and its participants are at the forefront of this innovation, applying DLT to transform traditional financial systems”.
The greatest significance of the pilot’s success is its achievement of interaction between two different DLTs without the need for a third party, he says. “Essentially, we're on Hyperledger Besu, which is Ethereum theory and based on blockchain, and HQLAX is on Corda, which is a different type of DLT.”
Hyperledger Besu is an Ethereum client designed to be enterprise-friendly for both public and private permissioned network use cases, with an extractable ‘Ethereum Virtual Machine’ implementation – which, explained simply, makes the implementation of smart contracts more user-friendly.
The biggest challenges in running the pilot related to figuring out how it was going to work in a technical sense, says Mr Ram. “That took some amount of time. But once that was done, it was then a question of coordinating between all the different parties involved.”
The process started earlier this year and took six months from start to finish, he says.
Other types of blockchains always said it was possible, but until now we've never proved it
Hyder Jaffrey, head of principal investments and digital assets at UBS Investment Bank, said in a statement: “It’s great to see proven evidence of interoperability between Fnality and HQLAX. Cross-chain DvP, enabling a Digital Repo, is critical in the wider delivery of a functioning digital asset market.”
A boon for treasuries
Initial beneficiaries of this collateral breakthrough will be bank treasuries rather than the bank client, says Mr Ram. “They are going to be able to perform intraday collateral movements, which will be really good for them to optimise their balance sheets intraday, and to make sure they've got liquidity in the right place.
“I don't think there will be any direct effects for actual bank clients today, in this particular use case, but [...] the Treasury function in banks can really start optimising the course that may lead to better pricing and so forth.”
Fnality was able to provide a central pool of cash liquidity for all kinds of use cases to enable banks to optimise their liquidity across different settlement platforms.
Mr Ram explains the pilot shows that interoperability doesn’t have to be just a theory. “Other types of blockchains always said it was possible, but until now we've never proved it. This is the first step in that direction.”
