The Singapore Exchange Limited (SGX) has increased its wager that distributed ledger technology will be the key to leadership in global financial markets in the future.
The exchange, which is the largest and fastest growing fx trading center in Asia, has invested an undisclosed amount in London-based foreign exchange startup Cobalt, a firm that is using distributed ledger technology similar to the bitcoin blockchain as a way to streamline post-trade settlements. Globally, foreign exchange represents the largest financial market in the world with an estimated $3 trillion a day in transactions.
Already, major trading firms, including Citadel Securities and XTX Markets, are among 22 firms testing Cobalt’s peer-to-peer beta version, with seed investors Citigroup and Digital Currency Group also backing the London-based startup. Cobalt intends to use the funds in the build-up to the public launch of its distributed ledger technology (DLT) later this year.
But it wasn’t just the foreign exchange platform in its own right that caught SGX’s attention, according to Michael Syn, head of derivatives at the exchange. Syn told Forbes the exchange views the strategic investment as an exploratory move to see how DLT might improve a wide range of financial services.
“What Cobalt is doing is pioneering a new set of workflows about efficiency, about cost flows,” Syn said. "But also, a pattern -- a successful pattern -- that’s established by Cobalt could also be applied to other marketplaces, for example, commodities, or futures, or equities.”
While Cobalt intends to use the money invested under terms that were also not disclosed to build out its team in anticipation of its public launch, SGX sees the investment as a way to signal DLT’s maturity to the rest of the world.
“Cobalt has evolved one large step towards market and the fact that it has other markets like SGX involved shows what’s possible in the future,” Syn said.
One reason for the derivatives boss’s confidence is a regulatory sandbox established last year by the nation’s central bank, the Monetary Authority of Singapore (MAS), designed to encourage experimentation while minimizing concerns about regulatory backlash should something go awry.
Taking advantage of that regulatory flexibility, SGX had previously participated in MAS-led Project Ubin, a collaborative effort with blockchain consortium Hyperledger, DLT consortium R3, and JP Morgan-created open-source platform Quorum, derived from the ethereum blockchain.
After more than a year of tests, the group last year determined that blockchain technology could eventually be a suitable replacement for the central bank’s system of Real-Time Gross Settlement (RTGS) for any number of assets.
While that potential is still a ways off thanks to current technological limitations, Syn positions the two blockchain efforts and others currently in the works as part of a larger push within Singapore to take a leadership role on the global financial stage.
“Singapore’s natural role in Asian marketplaces is an international hub. In miniature it does what London does,” he said. “And much of the innovation that we need to bring to the table is the role we can play as a small but innovative platform.”
That innovation has so far largely taken the form of joint efforts. But the Cobalt investment is the first time the company has invested directly in a distributed ledger startup.
Founded in 2015, Cobalt aims to use technology similar to the bitcoin blockchain but without a cryptocurrency to streamline the post-trade world. Similar to how bitcoin’s blockchain enables financial transactions without middlemen, Cobalt’s distributed ledger technology, called BlueSky, is designed to enable foreign exchange transactions while reducing the need -- and cost -- of middle and back office support.
Instead of using a cryptocurrency to incentivize the maintenance and accuracy of so-called public blockchains that anyone can join, BlueSky is a permissioned system that can only be accessed by trusted, approved entities. Along those lines, Cobalt last May revealed the group of 22 “launch participants” who are testing the platform.
“Cobalt has been very sober and client-focused in what they’ve done,” said Syn. “Where a centralized infrastructure is necessary and useful they’ve applied that and where a permissioned DLT is useful they’ve applied that.”
Last year, Cobalt announced plans to spin-off part of its blockchain work into a subsidiary to reimagine the way interbank messaging platform Swift and settlement provider CLS do business and more. The key difference in that work, code-named "Babylon" is that it seeks to hand-over much of the responsibility currently fulfilled by such trusted institutions to a shared but encrypted database.
While work on that project is ongoing, a number of players have emerged to compete using blockchain in foreign exchange, including Santander One Pay FX, which launched last month using Ripple technology and FXCLR which is building a blockchain consortium to reimagine FX from scratch.
“One of the beautiful things about building something new is you can build it correct,” said Adrian Patten, co-founder and chairman of Cobalt. “We’re not bound to legacy technology.”
In pursuit of such breaks from the old way of doing things, other exchanges have made similar strategic investments as SGX, most notably including Nasdaq’s backing of Chain and ASX’s backing of Digital Asset Holdings, both of which have resulted in more formal engagements.
Not everyone thinks distributed ledgers similar to those offered by Cobalt, Chain, or Digital Asset are even necessary to improve the way foreign exchange is conducted. In 2015 Frankfurt-based Deutsche Börse bought FX platform 360T, in 2016 Cboe acquired Hotspot via its purchase of the BATS market operator, and last year Euronext bought Fast Match, all of which specialize in foreign exchange, but don't employ blockchain technology. Perhaps most significantly though, CME Group earlier this year revealed plans to buy Nex Group (formerly ICAP), which runs the Traiana FX platform that processes $2 trillion a day in transactions, according to its site.
While Syn says it’s “too early” to talk about any potential interest on the part of SGX in actually purchasing Cobalt, he emphasized the value he sees in the company’s distributed ledger solution.
“FX is not disappearing anytime soon,” he said referring to crypto-idealists' view that the need for a preponderance of sovreign currencies may one day become obsolete. “If anything, FX is going to become a more important asset class as we’ve got change in trade patterns.”
