Blockchain Startup Joins Fray to Overhaul Banking Systems

Updated on

A startup run by former Google Inc. and Nasdaq OMX Group Inc. employees is jumping into the competition to use digital-currency technology to tackle financial companies’ slow, antiquated back-office operations.

Blockstack, a San Francisco-based firm, has taken the underlying technology behind bitcoin transactions and adapted it for mainstream finance, including clearing and settlement, according to Peter Shiau, the company’s co-founder and chief operating officer. A small group of banks have started beta testing Blockstack’s technology.

The new venture joins a field of companies including Nasdaq and Blythe Masters’ Digital Asset Holdings LLC that are trying to use bitcoin’s ledger, the blockchain, to streamline financial processes.

Settlement -- the final transfer of assets following a trade -- currently takes place in two or three days. Blockchain advocates say they could whittle the process down to a few minutes or even seconds.

While some see bitcoin as a challenge to currencies that are minted by nation states -- a practice that has prevailed since at least the heyday of the Roman Empire -- Blockstack’s goal is more humble. It wants to speed up and cheapen financial companies’ transactions while reducing errors.

“We’re not trying to destroy banking or financial services as they are today,” said Shiau, who previously worked at Standard Chartered Bank in product innovation. “We see what we’re building as technology that can help improve the back-office infrastructure that financial institutions are using.”

Blockstack’s team also includes Philip Harris, a former Nasdaq executive, as an adviser, and chief executive officer and founder Miron Cuperman, who used to work as a senior security engineer at Google. The company is raising funds and declined to identify its existing investors. It has fewer than 10 employees.

Finance’s Model T

Blockchain’s record-keeping technology has come to be seen as potentially the most important part of the bitcoin innovation. Shiau has a PowerPoint presentation that likens the currency to Ford’s Model T. He argues that the assembly line that produced the Tin Lizzy was more disruptive than the vehicle regarded as the world’s first affordable car.

The bitcoin network is open and decentralized. Digital currencies like bitcoin provide a reward to the computers on the network that run security and other processes.

In a private network like Blockstack’s, the reward isn’t so important. A private system consists of a few known parties who are willing to provide computing power to create a secure common ledger.

“When you have this private blockchain that’s shared by a number of financial institutions, all you’re doing is just keeping records of the transactions and who owns what,” Shiau said. “What’s nice about the blockchain is you can do that in real time. There are no fees involved.”

Trading settlement is provided by companies such as CLS Group Holdings AG and Depository Trust & Clearing Corp. U.S. regulators see those firms as systemically important to the financial system. Europe is developing a pan-continental platform called Target 2 Securities to help tie its capital markets together.

“This is technology that they can adopt,” Shiau said.

Digital Asset Holdings, the firm run by Blythe Masters, announced today that it will buy technology companies HyperLedger and Bits of Proof to broaden its reach in the burgeoning area of blockchain technology.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE