Japan Exchange Group Report: Practical Application of Distributed Ledgers Requires Third-Party Participation (Download the Full Report)

Financial giant Japan Exchange Group (JPX) released a new report (download the full text of the Coin Library). The report pointed out that after the distributed ledger is put into the capital market, it needs the participation of a third party to operate better.

The 27-page report, in which JPX mentions its proof-of-concept projects and key features, is a sign of JPX’s growing interest in blockchain following its partnership with IBM.

Given that the Bitcoin blockchain itself is designed to remove third parties from online transactions, JPX's proposal to "abandon" this feature in its derivative technology is bound to cause considerable controversy.

However, JPX pointed out that this claim is necessary in case other financial institutions are also using the same shared ledger, as the involvement of a third party can ensure the security of blockchain data.

The report states:

For business needs, the right to use stored data should be given to designated parties. However, this will lead to a public trust crisis in ownership verification, and the ownership of securities cannot be guaranteed. Therefore, data access privileges should be given to trusted third parties who are responsible for ownership verification.

JPX said that during the project’s proof-of-concept phase, the Central Securities Depository System acted as a certification authority, and therefore it believes that the system is as secure as decentralized technology and can act as a third party in the Bitcoin blockchain.

Other third parties who can facilitate blockchain transactions include regulators and IT vendors.

In addition, the report also said that in the event that block congestion causes transaction delays, the presence of a third party can ease the emotions of buyers and sellers and reduce the risk of settlement failure.

At the same time, large financial institutions have been studying how to maximize the speed and efficiency of shared ledgers without providing a complete transaction history to all participants.

JPX’s chief analyst believes that this problem, whether real or imagined, has become a major factor hindering the further adoption of distributed ledger technology.

Copy Bitcoin

Although JPX’s understanding of the enterprise-level applications of distributed ledgers is relatively narrow in the report, it praises the benefits that the advanced cryptography of the Bitcoin blockchain has brought to the financial industry.

While the Bitcoin blockchain is fully functional for enterprises, distributed ledger technology is still in its development stage and is not mature enough.

However, the report specifically noted that distributed ledger technology is “very attractive” for infrastructure construction because the system is not only immutable and resistant to failure, but also can create a shared ownership registry.

With these technological advantages, reshaping industry workflows can improve efficiency, including providing financial services innovations and significantly reducing operating costs.

The report evaluates distributed ledger technology from six perspectives, including its application in capital markets, productivity, consensus process, data privacy, practicality and cost.

JPX considers clearing and settlement to be the “most important use case” for blockchain because it can make workflows more efficient, but other use cases, such as trade or reconciliation, are more problematic.

Call to Action

In addition, JPX is determined to continue researching and supporting distributed ledger applications, even in the face of multiple challenges.

JPX pointed out that the main reason for its insistence on doing so is that distributed ledger technology can greatly save the costs of financial institutions by changing existing business processes, whether it is hardware, software or maintenance costs.

One of the reasons JPX released this report was as a call to action, first committing itself as an infrastructure operator to actively participate in blockchain technology experiments.

Unlike Bitcoin, which was launched in 2009, few people have studied the application of distributed ledger technology in the capital market architecture. Therefore, we must conduct corresponding experiments and optimizations until it becomes a mature technology that can be put into the capital market.