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Why stock markets love the blockchain and how Bundesbank and Deutsche Börse are readying to unveil a market prototype.
The German central bank Deutsche Bundesbank and Deutsche Börse are working together on a Blockchain prototype which will allow for functionality for the settlement of securities in a delivery-versus-payment mode for centrally-issued digital coins. This is yet more proof that markets are in love with Blockchain technology.
The system will also be able to transfer digital coins or digital securities alone, and will also be capable of settling basic corporate actions such as coupon payments on securities and the redemption of maturing securities.
In a joint press release, the Deutsche Bundesbank and Deutsche Börse said that they plan to develop the prototype in “the next few months.” They said that the developed product will be used to analyze the technical performance and scalability of “this kind of Blockchain-based application.”
Carl-Ludwig Thiele, a member of the Deutsche Bundesbank’s executive board, says:
“With the Blockchain prototype, the Deutsche Bundesbank and Deutsche Börse want to work together to find out whether this technology can be used for financial transactions, and if so, how this can be achieved. The Deutsche Bundesbank hopes that this prototype will contribute to a better practical understanding of Blockchain technology in order to assess its potential.”
While the Deutsche Börse and Deutsche Bundesbank prototype would certainly be a boost for Blockchain technology, there are other exchanges which are already using it.
The Korea Exchange of South Korea is exploring using Blockchain platforms for the off-board trading market. The Nasdaq has already announced the first ever private securities issuance using Blockchain technology and the NYSE has also been exploring its potential.
The London Stock Exchange is researching the various uses of Blockchain to find a new way to clear, settle and trade securities across Europe. The Australian Securities Exchange is doing the same in Australia as its counterparts in Europe and Japan, that is to look at ways to use Blockchain to undertake clearing operations along with IBM.
Blockchain technology is naturally suited to stock markets as the transfer of assets is undertaken and exchanges are made frequently. A private Blockchain or a ledger that is built, keeping in mind the rules and regulations of a particular exchange, could thus be greatly beneficial to these exchanges.
There have also been arguments made that exchanges of the future should deploy a public ledger such as the one Bitcoin uses, to provide greater access and transparency to the public. However, it remains to be seen whether Blockchain will form the backbone of future stock exchanges, but the optimism is certainly high.
The development of this prototype underscores the usefulness of Blockchain technology in the securities field.
There are a number of possibilities that the prototype enables which includes Blockchain-based payments and securities transfer as well as the settlement of securities transactions against instant and delayed payments.
The prototype will also enable the maintenance of confidentiality and access rights, which will be done in a Blockchain-based concept on the basis of a flexible and adaptable rights framework. The central bank’s press release also stated that it would be possible to identify potential areas where reconciliation processes and regulatory reporting can be simplified.
The prototype will implement a concept which is based on a Blockchain from the Linux Foundation’s Hyperledger project. The Deutsche Bundesbank statement said that the project will generally observe existing regulatory requirements.
The joint statement carried remarks from Carsten Kengeter, CEO of Deutsche Börse AG who expressed optimism on Blockchain’s efficiency potential. “Along with the Deutsche Bundesbank we are innovatively and creatively addressing potentially radical technological opportunities for the financial sector. We will continue to do our utmost to leverage Blockchain's efficiency potential and to better understand and minimize the associated risks of this technology.”
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