NAB, Westpac, CBA trial blockchain-based bond trading

The Commonwealth Bank, NAB, Westpac and Macquarie Bank are among 42 financial institutions testing a system for trading fixed income based on the technology that underpins bitcoin.

The banks are part of a global consortium of 42 major lenders, brought together last year by New York-based R3 CEV, which is working on ways blockchain technology could be used in financial markets. The consortium marks the first time so many institutions have collaborated on using such systems.

The bond trading trial also includes a number of major international financial institutions that have significant operations in Australia, including Citi, Goldman Sachs, HSBC and Morgan Stanley.

Although ANZ is not participating in the trial, it is separately collaborating with the not-for-profit Linux Foundation on developing an open source enterprise-grade blockchain framework for the finance industry.

While bitcoin was the first major use case for blockchain technology, the decentralised ledger of transactions model can be adapted to secure and validate any exchange of data, including real assets like commodities or currencies.

Variations of the blockchain technology can be used to enable smart contracts, which are automatically executed when pre-determined conditions are met.

As part of the experiment, the banks tried five different blockchain-technology vendors to test trading fixed income, including Ethereum, Chain, Eris Industries, IBM and Intel.

"We have raised the bar significantly with the sheer number of global financial institutions, distributed ledger technologies and cloud providers working together ... to demonstrate how this nascent technology can be applied to ... an actively traded asset class," said the head of R3's Collaborative Lab, Tim Grant.

The banks believe the technology could cut out middlemen and make their operations more transparent.

But analysts warn it is still early days for the technology, noting that bitcoin was invented just six years ago and developers are still working on the technology.

The G20's Financial Stability Board recently said assessing the systemic implications of fintech innovations would form a core part of the task force's policy work this year.

It also advised global regulators to propose rules to prevent fintech experiments from destabilising the broader financial system.

Beyond the R3 CEV, the blockchain model is also being trialled by securities exchanges including the ASX and NASDAQ for purposes such as post-trade services and managing shares in private companies.