The use of ledgers as part of the payments process is centuries old. In early banking systems, payments were made by exchanging valuable items such as gold coins. When goldsmith banks emerged in the sixteenth century, deposits were recorded on ledgers to enable payments to be made between customers sharing the same bank simply by making a change to the ledger rather than exchanging the physical assets. Soon a central clearing bank, at which all the member banks held accounts, enabled payments between customers of different banks. The clearing bank held its own ledger of payments in addition to the individual ledgers at each of the member banks. This basic concept is still applied to many areas of the financial services industry to this day.

Fast forward to 2009 when Bitcoin shook up the payments world by using a shared ledger called a blockchain to record and verify all transactions made using the currency, requiring no intermediaries such as banks to process payments. Users are incentivized to contribute resources to verify transactions, after which the relevant amount of Bitcoins changes hands directly between both parties involved in a transaction.

At first glance a blockchain might not sound like the most exciting of technological developments, but building on the broader concept of a distributed ledger and applying it to global financial markets could have a number of positive impacts on the efficiency, cost and risk issues currently associated with clearing and settling transactions – a topic that has been given significant attention by regulators since the financial crisis. The Bank of England is one of a number of regulators around the world that has tasked banks to understand how technologies such as cryptography and distributed ledgers can improve the way financial markets operate. When you consider that some of the infrastructure currently used in many aspects of financial services is more than 40 years old, it is not wildly revolutionary to consider the idea that they may no longer be appropriate for modern financial markets.

As a result, over the past year there has been a feeding frenzy of interest and outside investment in distributed ledgers, with vast sums of money being thrown at these technologies – albeit in a rather fractured way that often lacks the strategic, coordinated vision so critical to timely success. 

It is an all too common mistake with emerging technology to build and launch it to the market in isolation, hoping it will be effectively adopted and used. That will not work for global financial markets, whose infrastructure must be secure and scalable to meet the high security standards for the transfer of money and other valuable assets.

That is where R3 comes in. Placing an emphasis on working with the market from Day One, we’ve partnered with more than 20 of the top banks in the world, representing sales and trading, investment banking, trade finance, corporate banking, retail, asset management and custody businesses. These partners recognize that the best approach to bringing shared ledger technology to the broader market is to work together. We believe that the collaborative model is the best way to quickly, efficiently and cost effectively deliver these new technologies to global financial markets.

R3 was early to recognize the promise of distributed ledger technologies and began working in earnest with the banks more than a year ago to promote understanding of the opportunity presented by them. The banks understand that the most critical attribute of the successful adoption of distributed ledger technologies is a powerful network effect. The networks we ultimately develop will be appropriate to the group of counterparties they seek to connect.

Having established the network of member banks, we will now run the first industry collaborative joint working groups to design and deploy advanced shared ledger technology in the global financial sector, with the support of those banks and their experts in financial technology and markets structure. Where useful, these groups will work within a collaborative lab environment, or “sandbox,” to test and validate distributed ledger prototypes and protocols.

By collaborating on research, experimentation, design, and engineering, our aim is to help advance state-of-the-art enterprise-scale shared ledger solutions to meet banking requirements for security, reliability, performance, scalability, and auditability.

The opportunities of these technologies are vast and could transform how financial transactions are recorded, reconciled and reported – all with additional security, lower error rates and significant cost reductions. One thing is clear – distributed ledgers look set to play an integral role in the future of financial services.