The FIX Protocol in a Blockchain World
Ron Quaranta, Chairman of the Wall Street Blockchain Alliance, and Co-Chair of the FIX Trading Community’s Digital Currency/Blockchain Working Group.
For those of us in financial services who have been involved in the world of digital currencies and distributed ledgers (also known as a blockchain), 2015 was the year that this innovative technology finally appeared on the radar of every major bank, broker-dealer, exchange and institutional investor. On a global scale, entire teams within these organisations have been created to research and analyse how blockchain technology might integrate with existing financial markets workflows. Innovation labs have been set up to spearhead the development of this disruptive capability, and hardly a day had gone by that we did not read an article in business and trade publications touting distributed ledger technology and the coming disruption to financial markets. As we enter 2016, we will likely begin to see the implementation of many of these solutions on a wider scale. Thus, the purpose of this article is to briefly define what a blockchain is, discuss its history to date, and understand how the FIX Protocol may play an integral part in blockchain technology use in global financial markets.
What is the Blockchain?
The Blockchain is essentially the underlying technology associated with the digital crypto currency known as Bitcoin. As many readers already know, Bitcoin was launched as open-source software in early 2009, by the still anonymous Satoshi Nakamoto, based upon Nakamoto’s published 2008 whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”. The system is designed as a peer-to-peer online payments system, allowing participants to transact directly without needing an intermediary, with transactions verified by nodes on the Bitcoin network. Without diving too deeply into the more technical aspects of its operation, all transactions in the network are cryptographically recorded in a sequential chain of blocks (hence, “blockchain”), and each transaction references the block before it, thereby making illicit changes to the data extremely difficult. All nodes on the network hold a full copy of this public distributed ledger. Within this ecosystem, the blockchain unit of account is bitcoin itself. So with no central repository and no single administrator, all nodes on the network are incentivised to verify transactions, with their reward being the “mining” or creation of new bitcoin.
Bitcoin is the oldest and most widespread of the digital currencies, with a global market capitalisation of over USD6 billion as of late December 2015. However, it is not the only game in town. As of the time of this writing, there were over 650 publicly known digital currencies, many with little value, but most leveraging some form of blockchain technology.
So why is this important? Why is the concept of a blockchain relevant to financial services? To answer these questions, it is helpful to put the main characteristics of blockchain technology in focus:
- Blockchains are meant to be data stores for sequential or chronologically ordered data.
- Blockchains are designed to be immutable, or tamper resistant. The ability to rewrite or alter data would be so costly across a wide enough network as to be prohibitively expensive.
- Cryptography and its associated digital signatures, prove identity of, and enforce access by, participants within the network. This also prevents the problem of “double-spending”.
- Public blockchains are designed to be transparent and anonymous.
The Public versus Private debate
At this point, it is important to touch on a topic of significant industry debate, namely the growing discussion about public versus private blockchains. The Bitcoin Blockchain is an example of a public, fully decentralised, permission-less data store that is open to anyone wishing to participate in the network, and willing to adhere to the consensus mechanisms that enable its functionality. In addition to Bitcoin, Ethereum and Factom are well known examples of public blockchains. A private blockchain is often designed to utilise the most interesting aspects of blockchain technology, while maintaining the closed network aspects of many data systems in financial markets. As opposed to the decentralised model, the owner or administrator of a private blockchain maintains the authority to implement changes and define membership in that blockchain.
As we give thought to the many functions within the world of financial services, we start to envision how this capability might make workflows and data processing more efficient and cost effective. For example, how economically beneficial would it be for multiple banks to be leveraging a common, shared data store for a relevant business line? In a world where global financial organisations have literally hundreds of different databases, and every one of these firms has some form of “reconciliation” department, one can imagine the cost savings and growing transactional volume in a world of more efficient data processing. Currently, several firms are working on blockchain based solutions that would re-invent specific segments of financial markets processing, including syndicated loans, securities clearing and settlement and international trade finance.
None of the above as yet addresses the concerns that are being encountered within the industry about blockchain technology. How do competing firms leverage this technology while still protecting their own and their client’s data? How will regulators view industry participation? Can transparency make the burden of compliance easier? Are private blockchains simply different databases, and how can the full benefits of a distributed ledger be realised if participation is centralised? These and many other questions are already under serious consideration in the industry, and the landscape will invariably continue to develop over the coming year.
What is the role of FIX in all of this?
Up to this point, we have not really addressed the role of the FIX Protocol in the world of blockchain technology. The reason is simple. Given the dynamic state of this technology and its evolution over the past few years, the financial markets and members of FIX Trading Community are working to define not only integration points, but also potential use cases and best practices for a future blockchain world. In 2015, FIX formed the Digital Currency/Blockchain Working Group, with the mission to “…identify, analyse and define use cases and integration points for digital currency and distributed ledger technologies across the spectrum of capital markets requirements, and recommend best practices for FIX implementation and usage of this emerging technology in financial markets”.
The group has a broad membership, with participants from banks, broker dealers, blockchain start ups and more, and all with a wealth of industry experience. Within this group, members have embarked on a series of activities, including:
- Educational seminars for Working Group members, to deepen our group understanding of blockchain technology and its implications.
- Preliminary review and recommendations of FIX implementation for digital currency trading (with much of the FIX Protocol already quite useful for digital currency trading in the context of FX).
- Initiated review of FIX and wider industry standards of digital currency and digital asset identifiers, as well as global marketplace identifiers.
- Structured an initial review of securities clearing and settlement via blockchain, with a goal towards understanding impact to FIX related messages.
- Created framework for FIX integration in broader distributed ledger initiatives, including smart contracts and alternative digital assets.
- Initiated discussion about alternative FIX uses i.e. – embedding FIX messages within a data block, etc.
This article is meant to be a very basic introduction to the world of blockchain and FIX, and merely scratches the surface of this growing field and its implications for financial markets and beyond. In future articles, we will address specific use cases and well as dive into the capability at a technical and product level. FIX Members are also encouraged to join the dialogue by participating in the Community’s Digital Currency/Blockchain Working Group.
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