Blockchain ECP trial highlights need for central bank crypto-cash

KfW has joined the select group of capital markets institutions to have issued a security using blockchain technology. Though only a proof of concept, the transaction highlighted the fact that, without some kind of distributed ledger cash system, blockchain-based issuance has little to offer. If the technology is to realize its promise, central banks must weigh in and provide a solution.

  • By Lewis McLellan
  • 26 Sep 2017
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One of the major advantages of issuance via a blockchain or distributed ledger (a form of computer network where a record of every transaction is stored on every part of the network) is that it can remove the need for centralised clearing and settlement. 

Since counterparties are using identical accounting systems, the process of reconciling information between parties can be bypassed, meaning the time lag for settling securities goes away, and deals can settle instantly.

However, without a means of settling the cash leg of such transactions on the blockchain, this settlement efficiency is difficult to achieve. 

Without cash available to a distributed ledger system, the holy grail of digitalised assets, automatically executable bond documentation (through ‘smart contracts’) remains out of reach.

This does not mean that financial institutions must embrace Bitcoin or one of its myriad siblings in the cryptocurrency world. Such cryptocurrencies, which exist on publicly accessible blockchains, are ill-suited to the world of financial services, where privacy can be an important requirement.

There are two potential solutions, both of which are being explored by various institutions around the world. 

The first is some form of private digital currency run on a private blockchain. A consortium of private banks is already working on this project, calling it a Utility Settlement coin.

The idea is simple. The banks would create a cryptocurrency, fully collateralised by fiat currency held in a central bank, available only to financial institutions. Transferring ownership of a settlement coin would represent a transfer of a real unit of fiat currency. As such, it necessarily maintains a one to one exchange rate, unlike Bitcoin and other cryptocurrencies.

A consortium of banks in Japan is working on a similar concept, but one that would be made available to consumers, rather than financial institutions.

This isn't new, exactly. A superficially similar asset became available back in 2014 but has since become mired in controversy. 'Tether', like a potential utility settlement coin, had a 1:1 exchange rate and was ostensibly fully backed by privately held dollars.

However, Tether’s purchase agreement raised some eyebrows with this section: “Tethers are not money and are not monetary instruments. They are also not stored value or currency. There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money.”

Further controversy emerged thanks to Tether’s involvement with Bitfinex, a cryptocurrency exchange. When cryptocurrency investors attempted to sell cryptocurrencies on the Bitfinex exchange, they received Tethers, rather than genuine fiat currency. When some of Bitfinex’s practices were questioned, the market price of Tether fell.

Utility Settlement coin, backed by several of the world’s largest banks, is unlikely to run into such issues. However, while such a scheme need not have an effect on the overall money supply, creating a system for the digitalisation of fiat currency is natural territory for central banks. 

This is the second potential answer to the blockchain cash settlement conundrum.

The Bank of Canada and the Monetary Authority of Singapore are two of the furthest ahead on this path, but Sweden is also developing ‘e-krona’, a central bank digital currency that would be available to consumers.

While a Utility Settlement Coin would fill the market’s need for a distributed ledger means of settling the cash leg of securities transactions, a private initiative is unlikely to have the same pull as one sponsored by a central bank. 

Competing standards are not helpful when working to develop a fundamental piece of market infrastructure. Indeed, the very basis of the efficiency savings distributed ledger technology offers rest on there being a single, unified method subscribed to by a critical mass.

Most crucially, given that the security of such an asset remains in doubt (and concerns over cyber terrorism loom ever larger), central banks must remain at the heart of the money supply, holding the reins, ready to take action in case of attack from hostile parties. 

It’s simply too important to be left in private hands.

  • By Lewis McLellan
  • 26 Sep 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 417,651.57 1605 9.04%
2 JPMorgan 380,255.75 1735 8.23%
3 Bank of America Merrill Lynch 360,270.83 1308 7.80%
4 Goldman Sachs 268,034.61 924 5.80%
5 Barclays 267,242.43 1081 5.79%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,449.36 196 6.57%
2 BNP Paribas 38,734.80 217 5.60%
3 Deutsche Bank 37,615.10 139 5.44%
4 JPMorgan 34,724.19 118 5.02%
5 Bank of America Merrill Lynch 33,835.53 112 4.89%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,475.00 105 8.66%
2 Morgan Stanley 19,057.00 101 7.34%
3 Citi 17,812.08 111 6.86%
4 UBS 17,693.89 71 6.82%
5 Goldman Sachs 17,332.64 99 6.68%