Illinois' financial regulator has jumped on the blockchain bandwagon.

Illinois’ regulator has joined forces with the blockchain consortium spearheaded by R3, as financial watchdogs worldwide grapple with the emerging technology in a bid to better understand its opportunities and risks.

The Illinois Department of Financial and Professional Regulation will collaborate with the syndicate’s member base of around 80 financial institutions to develop blockchain-based applications that are scalable and secure enough to facilitate financial industry processes.

While R3’s members include the Bank of Canada and Hong Kong’s Securities and Futures Commission, this marks the first time a US regulator has joined.

“As Illinois’ financial regulator, we are committed to embracing the potential that distributed ledger technologies bring to our financial institutions,” secretary Bryan Schneider said. “Its potential to dramatically lower transactional costs, automate manual processes, and reduce opportunities for fraud and risk are truly promising. Through our collaboration with R3, we look to provide the support necessary to ensure the commercial and social viability of this emerging technology.”

Illinois, home to large Chicago-based exchanges and trading firms, is a leading global hub for derivatives trading.

Blockchain technology, a virtual distributed ledger of transactions shared peer-to-peer, can record ownership across a public network of computers rendered tamper-proof by advanced cryptography. It is already known as the platform for the controversial digital currency bitcoin, even though it is only one of several hundred applications that use blockchain technology.

The technology is causing a stir within the financial services sector as its supporters believe it could reduce hidden expenses in the financial system by ousting inefficiencies across areas such as payments, syndicated loans and equity clearing.

Financial institutions across the world are ramping up investments into blockchain in the hope that it will streamline various elements of their businesses. But last year, a wave of big banks including Goldman Sachs, Morgan Stanley, Santander and National Australia Bank abandoned the R3 project before its first round of funding commenced.

R3 lowered the amount it aimed to raise from $200 million to $150 million in its first round of equity funding. The start-up planned to give members a 60 per cent stake in exchange for the capital. But Goldman Sachs, one of the consortium’s founding members, baulked at being asked to contribute alongside a plethora of other investors. A source close to the process at Goldman Sachs last November told this publication the group became “saturated” as new members poured in, which resulted in a lack of headway being made and the project’s prospects became “unrealistic”.

Still, the R3 consortium is continuing to pique the interests of financial institutions and their regulators, particularly in countries that are seeking to place themselves at the forefront of financial innovation.

Earlier this week, the Monetary Authority of Singapore said it was ready to begin testing whether cross-border payments could be carried out using blockchain-based technology after it completed a successful pilot for conducting interbank payments. In collaboration with the R3 consortium, the city-state’s watchdog built a digital version of a Singaporean dollar for interbank settlement. During the trial, the technology was used to connect bank infrastructures to a shared ledger, which was made to gel with the country's electronic payment system, and this in turn automated the management of collateral.

Now the proof-of-concept has been completed, MAS is looking to establish blockchain-based solutions that will facilitate cross-border payments to settle directly using central bank accounts.

“MAS is in the early stages of discussions to develop links from Singapore to other countries using distributed ledger technology to allow cross-border payments to settle directly using central bank accounts,” the regulator said in a statement.