Over the past 12 months, the hype around distributed ledger technology (DLT) has reached new heights. We are seeing development of applications that aim to overhaul the infrastructure for everything from healthcare to education. The ability to store irrefutable information on a blockchain along with the capability to manipulate it using 'smart contracts' leads to alluring possibilities. Globally, companies have realized that blockchain could radically reshape the way information is distributed and processed, and are positioning themselves at the forefront of this transformation.

With many institutions engaged in blockchain projects in some shape or form, the financial services industry is no different. In 2017 we have seen rapid progress, with more experimentation and proofs of concept in blockchain, and the industry collectively reaching a better understanding of how the technology can be used to streamline trade processes and track assets more efficiently across different markets.

For many, including CLS, one of the first targets for blockchain application is in back-office operations between market participants, where it presents the opportunity to strip out frictions and redundancies that impede efficiencies and speed. But this is only the beginning, and blockchain could have applications in everything from trading platforms to payments.

With 2018 set to be the year we see the first real and material implementations of DLT in the financial services industry, firms must now look at how they can adapt to support further progress while effectively managing the risk of moving to a new technology.

Internal cohesion

Leading financial institutions understand that adapting to emerging technologies – be it DLT, artificial intelligence or quantum computing – and taking calculated gambles is a necessary part of doing business. However, while those engaged with setting the strategic vision and guiding investment are enthusiastically exploring the potential of DLT, the business side of these firms, focused more on the day-to-day operations, have been cautious about adoption. This is because stability and certainty of processes are imperative to the smooth running of services, and implementing new technology and systems can affect that stability and certainty.

What both parties need to realize is that success lies in working together cohesively, and that blockchain will enhance the speed of business processes rather than block it. In order to make tangible progress in 2018, firms must align their attitudes on innovation and adapt so that they can address risk in the short-term and implement successful blockchain solutions in the long-term. Rather than trying to overhaul everything at once, they must be strategic and thoughtful about how they incorporate the technology and how fast they should move.

Bridging the gap between legacy systems and blockchain

The financial services industry is highly regulated, with complex, and often manual, processes and operations that are now outdated and inefficient.

Integrating new DLT applications with legacy systems is not easy. Implementation of a new technology takes time, with progress measured in years, not months. As the first material DLT applications go live, we are likely to see more attention focused on the integration of blockchain technology with legacy systems.

This is another reason to adopt DLT in a cautious and phased manner. We must ensure that the new technology will function seamlessly alongside existing systems and that it offers a suitable solution to current challenges before using it for core functions. This way, we avoid repeating the mistakes of the past and embedding technology which may become costly to replace. This is why CLSNet[1] – our bilateral payment netting service built on a DLT platform – will offer participants the option of submitting payment instructions over existing SWIFT channels as well. The ability to choose, depending on the readiness of individual institutions, will allow banks and other financial institutions to adopt DLT at their own pace.

Similarly, by beginning with implementation in non-critical applications, regulators will be able to see the technology in operation and develop confidence in its robustness, security and stability before it is integrated more deeply into the systems supporting the financial markets. That is why we have started with DLT for netting at CLS. Once we are able to demonstrate the value and stability of DLT in improving netting in the FX market, we can start to build the industry's confidence around implementing the technology in other areas of our business.

Ultimately, what really matters is the ability for organizations to demonstrate DLT's ability to deliver tangible performance improvements and efficiencies in financial services. That is why 2018 will be such an exciting year, as we see the first DLT systems begin operation.

This will be a long haul, as the industry rightly prioritizes safety and stability through a measured and phased roll out, but nonetheless we have reached a critical moment in the DLT story. CLS is proud to play a leading part in this new chapter.

Ram Komarraju is Head of Innovation and Technology Delivery at CLS

[1] The delivery of CLSNet is expected in H1 2018. The service go-live will, like all CLS initiatives, be dependent on corporate governance and regulatory approvals, as well as market readiness.