Blockchain holds the promise to remove trusted third parties from transactions by creating a global network of peers that verify and record transactions on a shared ledger. While this represents a monumental shift in the way the financial system works, it will be a series of small changes and implementations that gets us there.
A partnership between Citigroup Inc. and Nasdaq Inc., which was announced at CoinDesk’s 2017 Consensus conference, gives insight into what it takes to bring a blockchain solution from the lab into the real world.
The partnership leverages Chain Core technology to connect Citi's treasury and payments platform to Linq, Nasdaq's private market blockchain platform. Citi created CitiConnect for Blockchain, which will allow Citi to seamlessly process payments for transactions in private company securities completed on the Nasdaq platform. Both products were built using Chain Core technology.
This partnership is not a research project or proof-of-concept. It is a real, live, platform operating at this very moment to settle cash securities transactions on the blockchain.
Instead of building an entire distributed network, like many blockchain evangelists want to see, Citi chose to use blockchain as a bridge. Connecting Citi’s current treasury infrastructure to Nasdaq’s Linq platform is an incremental step that allows Citi to see how a real blockchain network performs. This is step one in a potentially larger roll-out. While Nasdaq is the only current partner on the CitiConnect for Blockchain platform, the product is able to connect multiple blockchains to Citi’s treasury department.
Morgan McKenney, head of Asia-Pacific treasury cash management and trade solutions at Citi, outlined three key components in developing a blockchain solution. First, it must solve a real customer problem. Second, the solution must be extensible, meaning it should be applicable to more than just the initial use case. Finally, the product needs to be something that can be implemented within a year, according to McKenney.
Nasdaq represented a perfect partner with its private markets service, which already incorporated blockchain technology. Though the private markets segment is a small part of the overall business, the payments infrastructure is largely manual. Potentially hundreds of sellers from private companies deliver shares to a handful of buyers, and payments must be divided up among sellers. This creates friction not only in the actual settlement of payments, but also in compliance and record keeping. Finding this pain point is important in developing a product. As Vanessa Colella, head of Citi Ventures and chief innovation officer put it, "“We don’t want to be building for building's sake; we want to be building to solve an issue our clients have.”
Beyond the immediate need for a new payment solution, both Nasdaq and Citi recognize that this network can eventually be applied to other areas of Nasdaq’s business, or even expanded to include other partners.
Because both entities had a common partner in technology company Chain, rolling out the solution was easier. Getting multiple parties to agree on a common structure is hard enough from an internal standpoint, where legal, engineering, and compliance must all agree on the structure of a product. Adding multiple entities to the mix can make it nearly impossible. Having a common partner makes it easier to understand how a product will operate and what sort of rules will govern the platform. Because everyone was on the same page from day one, the product was taken from concept to live platform in just over a year.
Although Citi considered the possibility of creating a network of multiple partners for the product launch, it decided that starting small would be the best path forward. It is easier to establish a network between a small group of partners before adding new partners into the existing infrastructure. Operating rules have been defined and the viability of the product has been proven at this point, making the use case more clear for a potential new partner.
"Don't try to build a network from day one; the network comes later," said Brad Peterson, chief technology and chief information officer at Nasdaq.
In order to see more projects graduate from the lab into the real world, companies should use this experience as a road map. Make sure the solution you develop is solving a real problem. Work with a group of partners that are all on the same page, and make sure that all parties are included in discussions from day one. And most importantly, don’t be afraid to start small. As McKenney put it, “you have to walk in blockchain before you run.”