Six financial services institutions are looking to ‘smart contracts’ - powered by similar encryption techniques to those underpinning the bitcoin virtual currency - to help verify identity checks as required by new EU-wide regulations. MiFID II is the latest version of the Markets in Financial Instruments Directive. From 3 January it will require firms subject to reporting obligations to submit a legal entity identifier (LEI).
The aim is to make financial markets more resilient and transparent. However, complying with the new rules, which run to some 1.4 million paragraphs, will require the reconciliation of huge volumes of data about counterparties in transactions. The six financial institutions, Barclays, Credit Suisse, KBC, SIX, Thomson Reuters and UBS, today announced that they were applying blockchain encryption to reconcile the identity data anonymously across a shared digital ledger.
The idea is that reference data for each legal entity is encoded by each participating institution into a ‘hash’ which is shared across the ledger. Smart contracts based on the Ethereum blockchain platform reconcile the data against the consensus. Any anomalies will be thrown up but, crucially, only the creator of the hash will know which legal entity is involved.
In a statement, Christophe Tummers, head of data at UBS, said: ‘Traditionally, a firm such as ours quality checks data against multiple sources but we do not have a quality baseline against peers. Through blockchain-inspired smart contracts, the reconciliation of data can happen in almost real-time for all participants, anonymously.’
At present, the project is being piloted in a mock-live environment checking 22,000 LEI reference attributes for cash equity issuers. The pilot is to complete by the end of January, with further, staged, rollout dependent on the findings, the statement said.
The project is the latest example of growing interest in smart contracts – non repudiable agreements executed automatically by digital encryption – in commercial transactions. Earlier this year, insurance giant AXA announced a blockchain enabled service to pay out compensation to policy-holders in the event of flight delays without any action by the client – or intermediaries. HM Land Registry is also examining the potential of the technology to share the title register among parties in a transaction.
10 Readers' comments