The primary objective of the European Central Bank is to ensure price stability. This is also the best contribution we can make to achieving sustainable growth.1
Since the launch of the euro, the ECB has delivered on this commitment and rendered price stability a reality, maintaining an average inflation rate of below, but close to, 2%. And that is why the majority of euro area citizens trust the euro.2
Their trust is contingent on the independence of the central bank. Independence is granted to central banks to prevent politicians from seeking electoral gain through measures which boost economic activity in the short term but damage the long-term health of the economy and the country. It is also recognised that legal tender needs to be issued by a public authority. In the case of the EU, it falls to the ECB to issue the euro and decide on the denomination of banknotes.
We could not accept a situation in which, for anti-European or populist motives, certain euro denominations were not allowed to be used in some parts of the EU.
This established consensus is being challenged by private initiatives triggered by technical innovation. We are seeing ever more solutions in search of a problem.
Bitcoin and other crypto-assets claim to need neither trust nor the backing of a sovereign. They reject the paradigm of state-supported currencies governed by central banks, along with the role of financial institutions as trusted intermediaries. These self-proclaimed currencies, more accurately described as crypto-assets, have proved to be unfit for purpose, demonstrating that well-executed central bank policies are still the only sound basis for stability.
Trustless is pointless
The original bitcoin vision replaces trust in a dedicated intermediary with cryptographic proof. In other words, any two parties can transact directly with each other as peers without requiring a trusted third party. Their transactions rely on distributed ledger technology (DLT), sometimes floridly referred to as the “trust engine” of crypto-assets.
By leveraging cryptography and mechanisms to reach consensus among peers in a distributed system, DLT ensures the integrity and security of records which, in a centralised system, would be entrusted to a responsible third party. Users of crypto-assets can therefore depend on the underlying blockchains to avoid double spending and validate ownership.
However, trust isn’t entirely dispensable. In fact, users place their trust in the opaqueness of the arrangements through which influence is dispersed across the blockchain. Public blockchains still rely on key players to perform certain tasks, but these players are often unidentified and unaccountable. A protocol has to be created, maintained and operated, while the transactions it supports need to be validated. Developers and miners perform actions that affect the outcome of public blockchains. Furthermore, the practical usability of crypto-assets relies to a great extent on identifiable intermediaries to act as “gateways” between the crypto-asset ecosystem on the one hand and the financial markets and the economy on the other.
I have said before that we need to differentiate between “assets” such as bitcoin and the technology behind them, such as blockchain. Indeed, some of the technology is worth exploring and could also be of interest to central banks. That said, our role is not to drive technological adoption by the industry and the general public, but to ensure that changing preferences can be satisfied in a secure way.
While DLT is a necessary element of crypto-assets, it is not in itself their defining feature.3
The single distinguishing feature of crypto-assets such as bitcoin is the absence of an underlying claim, which makes it difficult for them to maintain price stability. Crucially, crypto-assets aren’t backed by any sovereign authority and, unlike financial instruments, they don’t give their holders ownership or contractual rights. Central banks provide confidence in money – as a store of value, unit of account and means of payment – by safeguarding the stability of the currency. By contrast with traditional currencies, bitcoin has been highly volatile over the past two years. Bitcoin’s average volatility in that period was close to 80 %, while many other crypto-assets showed even higher levels of volatility. This makes it impossible to use crypto-assets for anything but outright speculation.
Some crypto-assets have recently emerged that strive to minimise fluctuations in value against a currency of reference, but even they are no alternative to the euro. These so-called “stablecoins” broadly fall into two categories: those that are backed with an underlying asset and those that rely on an algorithm to continuously match the supply and demand of circulating units. Unsurprisingly, the stablecoins that show the least volatility are those that back every issued unit with an equal amount of fiat currency. Why use a proxy, then, if you can have the real thing – unless the issuers of that proxy seek to interfere with the control of trusted assets circulating in the economy
The poor performance of crypto-assets is not an excuse for complacency, but rather a reminder of the importance of the central bank’s objective to maintain price stability. Fulfilling this objective is conditional on the independence of the central bank, as ensured by a narrow but clearly defined mandate. Central banks must not be overburdened with multiple goals without having the appropriate instruments to achieve them. This brings me to the role of the ECB in the oversight of market infrastructures.
Less is more
The ECB has a Treaty-based task to promote the smooth operation of payment systems, as part of which it takes a close interest in the regulatory framework for market infrastructures which clear and settle securities and derivatives in euro, in particular central counterparties (CCPs). This reflects the systemic impact CCPs can have in situations of extreme stress, by disrupting repo markets or channelling liquidity strains to banks – which are also monetary policy counterparties – thus affecting the circulation of liquidity in payment systems. Ultimately, CCPs may need to rely on central banks as lenders of last resort. Central banks therefore have an important role to play in the regulation of central clearing – a notion which is largely recognised but often misunderstood.
In this context, let me say a few words about recent developments in the area of CCP regulation, and in particular the outcome of the legislative process regarding the revision of the supervisory framework for CCPs, the European Market Infrastructure Regulation (EMIR II), and the recommendation to amend Article 22 of the Statute of the ESCB and the ECB. The ECB recommended to EU legislators that its Statute be amended to clarify that the ECB had legal competence over CCPs, which would have allowed it to perform its statutory monetary policy role under EMIR II. We made the case that the ECB needed explicit general competence to monitor and address risks relating to our mandate, including broad discretion to take necessary measures in exceptional situations where the stability of the euro is at stake.
We also cautioned repeatedly against the positions taken by some Member States – particularly those who traditionally uphold the independence of monetary policy – and ultimately reflected in the draft amended text of Article 22 discussed by EU legislators. Under this approach, the ECB would have had no competence over EU CCPs, contrary to its mandate as central bank of issue for the euro, which calls for powers over all euro clearing regardless of its location. The ECB would have been given an exhaustive list of specific and circumscribed powers – replicating the present and future provisions of EMIR II – in respect of some systemic third-country CCPs, as designated by the European Securities and Markets Authority (ESMA). This would have been uncharacteristic and overly granular for the ESCB Statute, which is primary law and gives the ECB broad discretion in the exercise of its monetary mandate, and it would have violated the ECB’s functional independence. This was compounded by a requirement that ECB measures be “in alignment with” legislative acts and measures taken under those acts. Given these grave legal concerns, the Governing Council concluded that the final text seriously distorted its recommendation and interfered with fundamental principles of the Treaty, including the independent exercise by the ECB of its monetary policy.
The recommendation to amend the Statute was therefore withdrawn, which is a matter of regret. The Governing Council did, however, make it clear that the ECB remains supportive of the objectives of EMIR II and is fully committed to contributing to its implementation where legally possible and in line with its mandate. The ECB looks forward to fruitful cooperation with ESMA and other authorities in taking this forward.4
In times of upheaval in global payment markets, it is all the more important for Europe to close ranks. In the United States we have already seen two mergers of two significant payment service providers this year. Both mega-mergers had a market value of $55 billion and more could follow. In such dynamic markets, in which economies of scale play a pivotal role, we should not get lost in national details but should self-confidently enhance the conditions of the European single market and the competitiveness of its participants, without, however, putting up protectionist barriers.
Allow me to conclude.
As central banks, we must remain true to our core mandate. Through change or crisis, we must retain the capacity to adapt to evolving needs and do what needs to be done. But that should not come at the expense of independence or accountability.
Ultimately, we will be judged on how we deliver price stability. Trust is the central bank’s most valuable asset.5
ASX has successfully opened the Customer Development Environment (CDE) for its new equities clearing and settlement system to replace CHESS, which is based on distributed ledger technology (DLT). The first of seven ‘drops’ of software code was made available to customers on Tuesday 30 April. Additional functionality will be released at approximately eight-week intervals, culminating in full functionality in the CDE by mid-2020.
“Delivering the development environment for customers on schedule is a major step forward in ASX’s CHESS replacement journey”, said Cliff Richards, ASX’s Executive General Manager Equity Post-Trade Services. “We are proud of this achievement and very grateful for the support of our partner Digital Asset and our customers. While we believe distributed ledger technology offers exciting opportunities for the whole market to innovate, there is much still to do. We continue to work closely with our customers as we progress towards delivery of the new system.”
The opening of the CDE allows customers to interact and experiment with the new system. Once connected, users can design, build and test system changes, access some of the new business functionality, and compare various access options.
Customers can connect to the new system directly via a DLT node, which provides access to real-time, synchronised, source-of-truth data. This innovation is designed to reduce costs and complexity, and facilitate new business opportunities for intermediaries, issuers, investors and other users. While ASX encourages this mode of connection, other access options are also available, including the ISO 20022 global messaging standard via AMQP and SWIFT, and a web browser for low volume, infrequent usage.
ASX is on-track to go-live with the new DLT-based system in March-April 2021. The timetable and functionality reflect what the market has asked for through ASX’s extensive public consultation process.
“We know our progress is being watched internationally and is an important bellwether for the technology’s adoption”, said Peter Hiom, ASX Deputy CEO. “It represents the first time market participants anywhere in the world can experience the benefits of ‘taking a node’ and establishing direct connectivity to a golden source record of real-time data via distributed ledger technology.”
Yuval Rooz, Digital Asset Chief Executive, said: “This is an important milestone for everyone involved in the CHESS replacement project, which continues to proceed according to the implementation timeline set by ASX. With the delivery of the CDE, ASX customers get their first glimpse of what the new CHESS system can provide.”
“As we advance to the next phase of this ambitious project, we’re excited to continue working closely with ASX to provide an exceptional developer experience and help ASX stakeholders realise the transformative benefits of distributed ledger solutions and the unique capabilities of DAML*”, added Louise Boreham, Senior Product Manager at Digital Asset in Sydney.
Should we radically rethink the role of cash to deal with the lower bound on interest rates?
The lower bound on interest rates has been a major challenge for central bankers in the multiple crises over the last ten years. It threatens the effectiveness of monetary policy by preventing it from steering financial conditions. Moreover, the continuous decline in both the real rate and confidence in the central bank, as well as resistance at the retail level, raises the question of whether negative rates should be part of the standard toolkit of central banks.
In the context of the Eurosystem’s asset purchase programmes, the combined package of negative nominal interest rates and lending schemes that incentivise banks to increase lending (e.g. the targeted longer-term refinancing operations, or TLTROs) have been an effective and appropriate way to combat these challenges. While cash represented the largest part of central bank balance sheets before the crisis, other elements of the balance sheet have since gained more prominence in the operational framework of monetary policy.
Some people want to abolish cash by taking advantage of recent technological advances, such as distributed ledger technology (DLT), or replace public money with private money, in total denial of people’s trust in liabilities issued by central banks and the fact that their continued demand for cash exceeds GDP growth. Others argue for the introduction of a dual currency scheme where the central bank would divide the monetary base into two separate local currencies – cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate – the conversion rate – against e-money, which could be manipulated to match negative rates on e-money by setting the conversion rate for cash lower than one to one.1
I have experienced the nightmare of dual exchange regimes before the euro and I have doubts about these arguments. Our unconventional measures have proven sufficient to meet the challenges of low inflation. The Governing Council has confidence in the sustained adjustment in the path of inflation. Recent evidence supports the hypothesis that there is some substitutability between conventional and unconventional monetary policies.2
Additionally, while being able to set significantly negative rates may work smoothly in an economic model, I am less certain how the general public would react, particularly after millennia of positive nominal rates. Not only would such rates be deeply unpopular, there may also be unintended changes in behaviour that could dampen the effectiveness of the measure.
The fact that banks do not pass negative rates on to most depositors,3 and notably not to households, is a warning sign for central banks of how people may react if attempts were made to extend the lower bound of rates downwards by replacing cash with some form of remunerated digital currency. What assets the central bank ought to hold against these widely held liabilities driving bank disintermediation and deleveraging?
A potential decision to issue a central bank digital currency (CBDC) needs to be assessed in relation to the impact on the financial system. In an extreme case, during a systemic banking crisis, holding risk-free central bank-issued CBDC could become vastly more attractive than bank deposits. There could be a sector-wide run on bank deposits, magnifying the effects of the crisis.
Even in the absence of a crisis, readily convertible CBDC could crowd out bank deposits – putting the two-tier banking system at risk. Then, the efficient flow of credit to the economy would likely be impaired. The central bank – now holders of deposit funding – would have to decide which projects to finance, either directly, by replacing commercial banks, or indirectly, by deciding which banks would receive funding. This would lead to a situation in which the central bank pretends to know better than the established system of the decentralised allocation of credit.
Overall, there is currently no convincing motivation for the Eurosystem to issue CBDC to the general public. It is unnecessary and appears to be disproportionate to the aims put forward by its proponents. There is no need to fix something that is not broken. If anything, one could imagine a digital representation of cash that replicates the features of cash in the reasonably distant future, if people demanded it. And I have not even mentioned the insufficient robustness or reliability of some technologies like DLT, or their energy insufficiencies and dependencies.
How does technological change affect the monetary transmission mechanism and monetary policy?
Technological change has multifaceted effects on the transmission mechanism. It is important not to jump to conclusions, for example that, because the Phillips curve has become flatter, monetary policy needs to be more aggressive. Let me add that, beyond technological changes, additional liquidity demand factors also stem from regulatory change, fragmentation and the fact that the banking union is incomplete.
I will consider how technological change affects the following three broad channels of monetary transmission, without focusing on the consequences structural changes will have for the operational framework:
- How policy rates affect market interest rates and financial conditions.
- Labour markets and the non-accelerating inflation rate of unemployment (NAIRU).
- Price-setting and the Phillips curve.
Financial innovations have the potential to impact the way the economy is financed
A change from bank-based to market-based financing has been taking place for some time in the euro area, partly related to financial innovation. This has led to firms having a more diversified financing structure and has improved their resilience to shocks emanating from the banking system. At the same time, corporate exposure to volatility in market rates has increased.
Fintechs can lead to further bank disintermediation, but also financial deepening, by allowing otherwise constrained households and firms to borrow.4 In addition, fintech can strengthen unregulated lending activities, posing challenges to financial stability. This might affect the transmission mechanism, although how it will do so is not yet clear.
Labour markets and the NAIRU
The possible disruption from technological change is likely to be felt in labour markets. Email, videoconferencing, secure VPN5 connections and outsourcing across countries all enable services to be provided from a distance, and permit a greater degree of flexibility in working practices – a massive socioeconomic shift.
In the labour market the internet enables more services to be offered with less intermediation at lower prices. Fragmentation of labour time is shown in the diverging results of compensation per employee and compensation per hour worked.
For some workers this is a positive development, allowing them to participate in the workforce where previously they were excluded.6 For others, the greater individualisation can lead to insecurity, affecting households’ income. More individualised roles can also weaken the power of collective bargaining to maintain the labour share of income.7
While the productivity-enhancing aspects of digitalisation might tend to raise potential output growth, the effects operating through labour and capital are more uncertain, and might even work in different directions.
There may be some substitution of labour for capital, with possible repercussions for the bargaining power of workers, and a shift in investment to the IT sector as a result of digitalisation and servicification. If there is a skill bias in the transition to digital technology, this could lead to a greater mismatch in labour markets, and therefore a higher NAIRU and lower potential output growth.
On the other hand, digital production and supply chains, and digital communication and connectivity, would tend to lower the NAIRU and raise potential output, because of the productivity increases resulting from faster collection and evaluation of data, and the greater efficiency of digitally underpinned production.
The overall effect of digitalisation and new technologies on demand and supply therefore depends on many factors. These include the initial conditions: economies with high-quality institutions and governance are likely to see faster adoption and implementation of digital technologies and a faster impact on potential output.
From a monetary policy perspective, it is important to monitor the digital transformation of the economy. Some economists argue that output, productivity, intangible investment and prices have become more difficult to measure as a result of digitalisation. Literature suggests that, even though some mismeasurement exists, its impacts may not necessarily be greater than in previous episodes of technological change.8
But the analysis is ongoing, with various opinions and sometimes conflicting results. Of course, the fast pace of change across all areas of the economy also requires us to update our tools for monitoring it, and leverage the opportunities modern technology gives us, including new and better data.
Price-setting and the Phillips curve
Technological progress poses a particularly acute challenge because of its direct impact on businesses’ price-setting behaviour; behaviour that directly underlies the inflationary process.
The growing importance of e-commerce, rapid product introduction and substitution, and the quality adjustment of new products also pose their own challenges for measuring inflation. Technological progress has resulted in the creation of products such as smartphones and internet service providers that had no equivalent in the past; failing to properly measure the quality improvements in new products can result in an upward bias in measured inflation. On the other hand, the reduction in shelf-life of many products and the heavy discounting of less-fashionable older versions could instead create downward bias in traditional price indices.9
Technological changes to price and wage-setting behaviour have much deeper relevance for central banks than just the measurement of inflation. The speed and extent of how inflation reacts to shocks affects the optimal monetary policy response:
- E-commerce may result in suppliers changing prices more frequently.10 Not only are Amazon’s prices more flexible than prices of brick-and-mortar stores, Amazon’s competitors are forced to adjust prices more often for products that are also offered by Amazon.11More frequent price changes result in a steeper Phillips curve – prices react more quickly and strongly to changes in costs and output. This could also mean that inflation reacts much faster to monetary policy.12
- Since online stores effectively offer the same price across locations, e-commerce may restrict the ability of businesses to set prices that deviate substantially from those of large online retailers while reflecting local conditions. So prices may change more often, but they may be more uniform, which in turn may restrict the ability of prices to reflect idiosyncratic and regional shocks.13
- E-commerce changes not only how firms set prices but also how consumers shop. It has revolutionised the transparency of pricing both within and across countries, allowing consumers to easily compare prices and swap one product for another. This can result in higher demand elasticities, eroding the monopolistic and monopsonistic power of suppliers and reducing mark-ups. Profit margins at Amazon (less than 4%) are much lower than at Walmart (more than 20%).14 Such a change in demand elasticities and mark-ups can be viewed as a flattening of the Phillips curve.
- Finally, the emerging prevalence of e-commerce can create new opportunities for consumers to switch their shopping outlets over the business cycle. For example, there is evidence that households actively exploit price differentials across stores and “trade down” in recessions (e.g. switch from a regular grocery store to a discounter). It could be predicted that this switching will be amplified in the future because switching to an online store is particularly easy. As a result, aggregate “true” inflation may be more cyclically sensitive than is suggested by headline inflation.15
The impact of e-commerce on the slope of the Phillips curve is uncertain, and studies have generally struggled to find large effects on annual inflation. Given the overall difficulty in estimating the slope of the Phillips curve, this is not entirely a surprise.
As with measuring consumer price indices, the greater availability of more granular data has enabled a much greater understanding of how businesses set prices. But while policymakers should adapt policy to take into account changes in the underlying price-setting process, we should also exercise due prudence, given the uncertainty surrounding model estimates.
Price stability-oriented monetary policy needs to monitor innovations and their impact on financial conditions, economic growth and inflation. And we have to be mindful of changes in the information content of the indicators that central banks use as a basis for policy decisions (e.g. monetary aggregates and inflation rates).
As the impact of innovations cannot be estimated in advance with sufficient certainty regarding the direction, size and duration of the effects, and uncertainty therefore prevails, monetary policy should act prudently and be forward-looking.
Livio Weng, Chief Executive Officer of Huobi Global, commented:
“This is just one more way that Huobi is seeking to improve the global digital asset and blockchain community. Once launched, Huobi Chain will offer users a variety of benefits, including security, transparency, fast, scalability, and smart contract capability.”
Huobi Chain uses BFT-DPoS (Byzantine Fault Tolerance — Delegated Proof of Stake) as its consensus mechanism and will be built from the ground up to ensure security and safety.
The blockchain will feature efficient dual chain functionality: Huobi Chain will be designed to accommodate high speed, high frequency transactions and will support complex applications like business and financial contracts. Regarding governance, Huobi Chain will have both on-chain and off-chain elements.
In late June 2018, Huobi Group opened its London office and appointed Lester Li as European Exchange Director and Josh Goodbody as General Counsel and Chief Compliance Officer at Huobi UK. The digital exchange will leverage London technology talent pools and an open cryptocurrency regulatory environment to achieve growth.
The company has recently obtained a full Distributed Ledger Technology (DLT) license by the financial watchdog in Gibraltar, a British Overseas Territory and headland on Spain’s south coast. The firm founded by Leon Li processed around $1 billion in trades daily as of March 2018, Huobi reported. The full DLT license awarded to Huobi will help the cryptocurrency exchange expand its business in the European Union and set up operations in such fiscally friendly jurisdiction.
Bern, 14.12.2018 – During its meeting on 7 December 2018, the Federal Council adopted a report on the legal framework for blockchain and distributed ledger technology (DLT) in the financial sector. The report shows that Switzerland’s legal framework is well suited to dealing with new technologies, including blockchain. Nevertheless, there is still a need for selective adjustments. The Federal Council also noted the analysis of an interdepartmental working group on the money laundering and terrorist financing risks posed by crypto assets.
It is predicted that distributed ledger technology and blockchain technology have considerable potential for innovation and enhanced efficiency both in the financial sector and in other sectors of the economy. The Federal Council wishes to exploit the opportunities offered by digitalisation for Switzerland. It wants to create the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and blockchain companies. Moreover, it wants to consistently combat abuses and ensure the integrity and good reputation of Switzerland as a financial centre and business location.
The report provides an analysis of relevant framework conditions, clarifies the need for action and proposes concrete measures. It is based on the work of the blockchain/ICO working group, which was set up by the Federal Department of Finance (FDF) in January 2018 and which also consulted the fintech and financial sector as part of its work. The analyses show that there is no need for fundamental adjustments to the Swiss legal framework, but that there is still a need for specific adjustments. The Federal Council has instructed the FDF and the Federal Department of Justice and Police (FDJP) to draw up a consultation draft in the first quarter of 2019 in a bid to:
- in civil law, increase legal certainty for the transfer of rights by means of digital registers,
- in insolvency law, further clarify the segregation of cryptobased assets in the event of bankruptcy and examine the segregation of data with no asset value,
- in financial market law, devise a new and flexible authorisation category for blockchain-based financial market infrastructures,
- in banking law, reconcile the bank insolvency law provisions with the adjustments in general insolvency law, and
- in anti-money laundering law, more explicitly anchor the current practice of making decentralised trading platforms subject to the Anti-Money Laundering Act.
On 7 December 2018, the Federal Council also took note of a report by the interdepartmental coordinating group on combating money laundering and the financing of terrorism (CGMF) on the money laundering and terrorist financing risks posed by crypto assets and crowdfunding. The analysis shows that cryptobased assets pose a threat in the area of money laundering and terrorist financing. Due to the small number of cases, however, the real risk in Switzerland cannot be estimated conclusively. Nevertheless, Switzerland has a comprehensive regulatory system in place, which is why further improvements need to be addressed with internationally coordinated measures. The Federal Council has also instructed the FDF to examine whether anti-money laundering law should be adapted with regard to certain forms of crowdfunding.
The service, which supports compliance with certain principles of the FX Global Code of Conduct, is expected to improve intraday liquidity, reduce costs, improve operational efficiencies and ultimately support business growth thanks to its standardized and automated payment netting process.
The Bank of China (Hong Kong) was added to CLS’ blockchain-powered service. Barry Lo, General Manager, Bank-wide Operation Department of Bank of China (Hong Kong), commented: “We take great pleasure in participating in CLSNet, which will enhance operational efficiency in trade matching and payment netting for non-CLS settled currencies such as CNH, and strengthen our risk management. This underscores our strong commitment to driving Fintech innovation and represents a major step forward in the application of new technology in our businesses.”
National Settlement Depository (NSD), Russia’s central securities depository, organized a special panel discussion focused on the infrastructure of the crypto assets market at Sibos, an international financial forum.
Panel discussion participants included representatives of global companies experienced in implementing real projects based on distributed ledger technology. Colin Platt, Blockchain & Cryptocurrency Specialist, 11:FS, moderated the discussion; speakers included Artem Duvanov, Head of Innovation, NSD; Walter Verbeke, Global Head of the Business Model and Innovation, Euroclear SA/NV; Joseph Lubin, co-founder of Etherium and CEO of ConsenSys, and Igor Khmel, founder and CEO of BANKEX.
Today, the issue of developing the crypto asset market remains very important. An imperfect legislative framework and the absence of reliable infrastructure prevent the inflow of funds into crypto currencies and ICO. Against the background of the first regulatory steps for qualifying and structuring this sphere, the issue of investor rights protection remains crucial.
Despite the diverse group of panel participants and their different views of DLT development, the general opinion among delegates was that infrastructure for crypto assets is necessary, and its transformation is inevitable.
Igor Khmel described the problem: “Today, the crypto market and crypto exchanges lack funds from major institutional investors. These investors fear risks associated with crypto assets transactions. The parties lack the capacity and expertise of depositories which do not yet work with crypto exchanges.”
Walter Verbeke pointed out: “In capital markets, we see risks which are inseparable: counterparty risks, liquidity, credit, and settlement risks, etc. These risks are not associated with securities or with some elements of infrastructure, such as central securities depositories. They are related to any capital market. These markets created CSDs to manage their risks. We shall create our own roles, controls, and management procedures in the DLT world. This will let us operate in the same safe and effective environment.”
Joseph Lubin shared his experience: “We have developed a decentralized architecture, but due to the regulatory specifics we need CSDs now. As far as we can demonstrate that this system can work efficiently and reliably, we will be able to discuss changes to the legislative framework.”
Artem Duvanov added: “Our goal is to contribute to the emergence of a new class of assets for investors, as well as the ecosystems for ICOs and for the circulation of digital assets on the secondary market. We head up the initiative for developing D3ledger, a distributed digital depository, which will perform CSD functions – record-keeping, safekeeping, servicing assets, and conducting settlements, in a decentralized environment.”
TORONTO; Oct. 22, 2018 – Payments Canada, the Bank of Canada, TMX Group, Accenture (NYSE: ACN) and R3 have published a report demonstrating the feasibility of clearing and settlement of securities using distributed ledger technology (DLT).
The findings are a result of the third phase of Project Jasper, a collaborative research initiative between Payments Canada, the Bank of Canada and TMX group to experiment with an integrated securities and payment settlement platform based on DLT.
Whereas previous phases of Project Jasper focused on the clearing and settlement of high-value interbank cash payments using DLT, phase III explored an integrated payments and securities infrastructure.
The project involved a hands-on exploration of settlement and payment interactions in a private distributed ledger network by building and testing a proof-of-concept (POC) system designed to be integrated with existing market infrastructure. Securities and cash were brought on ledger through the issuance of digital depository receipts (DDRs) by the Canadian Depository for Securities and the Bank of Canada respectively, allowing POC participants to settle simulated securities against simulated central bank cash on the distributed ledger. Equity and cash DDR could be redeemed after their transfer since settlements were final and irrevocable.
The proof of concept allowed clearing and “delivery versus payment” settlement —and when more broadly implemented, would reduce counterparty risk and free up collateral— demonstrating that it is possible to complete post-trade settlement of netted and novated transactions on a DLT platform, while preserving privacy for market participants and their transactions.
The 36-page report provides the comprehensive findings of the research; Payments Canada, the Bank of Canada, TMX Group and Accenture presented initial findings from the research at the Payments Canada SUMMIT this past May. Among the report’s key findings:
- A distributed ledger technology platform can be used for a payment and securities settlement system. The proof-of-concept platform constructed was able to process pledge, transaction and redeem functions in a manner designed to address the privacy and scalability requirements of the Canadian system. The platform was also capable of handling the different participant sets so that each participant was only capable of performing those functions for which they were authorized.
- The loose integration framework of the project left the two authorities involved — the Bank of Canada for cash and Canadian Depository for Securities for equities — in full control of their respective instruments or tokens.
- Jasper Phase III was a focused proof of concept, and expansion to multiple parties and asset classes, will require further study to determine the impact of DLT with respect to cost savings or efficiency gains. An expansion of scope could span a number of possible dimensions — e.g., multiple assets, more of the trade and post-trade settlement lifecycle, and additional types of trades.
“We are pleased with the Phase III outcomes and the results achieved by bringing members of Canada’s financial market ecosystem, including TMX, financial institutions and the Bank of Canada,” said Andrew McCormack, CIO at Payments Canada. “Our results demonstrate the need to continue to broaden the scope of Project Jasper and actively explore what opportunities, and challenges, DLT could offer in the integration of financial markets and for the Canadian economy.”
John Lee, Managing Director of Enterprise Innovation & Product Development at TMX Group, said, “Project Jasper findings offer critical insight to understanding how we can adapt as an industry to a rapidly evolving global financial ecosystem. There is more to be explored to define how this technology will best serve the capital markets space. We look forward to the continued narrative.”
Scott Hendry, Bank of Canada Senior Special Director, Financial Technology, said, “DLT is a promising technology that has the potential to reduce costs for participants and open new opportunities. Phase III of Project Jasper gave us the opportunity to test the technology further, and work remains to be done to determine how it can be set up to maximize the benefits for the whole financial system.”
John Velissarios, Accenture’s Blockchain Technology & Security Lead, said, “We’re very excited to make available the full report of Project Jasper Phase III, which shows that it’s possible to deliver payments by directly swapping cash from buyers to sellers. Phase III has proven that distributed ledger technology can be used for clearing and settlement of securities and could play an important role in promoting financial market integration.”
Groundbreaking study proves DLT can process more than 100 million trades per day
New York/London/Hong Kong/Singapore/Sydney, October 16, 2018 ‒ The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced the results of a benchmark study which demonstrated for the first time ever that distributed ledger technology (DLT) is capable of supporting average daily trading volumes in the US equity market of more than 100 million trades per day.
The study, which was conducted by Accenture with additional support provided by technology service providers Digital Asset (DA) and R3, proved that DLT can perform at levels necessary to process an entire trading day’s volume at peak rates, which equates to 115,000,000 daily trades, or 6,300 trades per second for five continuous hours. Currently, public blockchains supporting crypto-currencies operate at single or double digit per second performance, which until now was the only indication of the potential volume that a private DLT might be able to support.
DTCC noted that the study provided a starting point and only tested basic functionality. Additional work will be necessary for DTCC to determine if DLT can meet the resiliency, security, operational needs and regulatory requirements of its existing clearance and settlement system.
Murray Pozmanter, Head of Clearing Agency Services at DTCC, said, “We are excited to lead this important work to advance the performance capabilities of DLT and help create new possibilities for leveraging the technology more broadly across financial markets. As an early adopter of DLT, we are encouraged by the results of the study because they prove that the technology’s performance can scale to meet the needs of markets of different sizes and maturity.”
Functional Prototype of US Equity Clearance & Settlement System
DTCC commissioned the benchmark study and provided expertise and requirements for Accenture to build functional prototypes of the US equities clearing and settlement system using DLT. During the 19-week study, DTCC and Accenture ran DLT performance tests using commercial DLT platforms offered by Digital Asset (DA platform) and R3 (Corda platform), whose engineers provided support on performance tuning. DTCC’s main objective was to analyze DLT’s ability to process the massive trading volumes of the US equities market, not the capabilities of individual commercial platforms.
Accenture built a network of more than 170 nodes to model the financial ecosystem of exchanges, market participants and broker/dealers supported by DTCC. The prototypes were designed to test the capture of matched equities trades from exchange DLT nodes, novation of those trades with DTCC acting as the central counterparty (CCP) to maintain trading anonymity on the ledger, creation of netted obligations and settlement of the trades. The test environment for this study was setup in the cloud.
“This project answered key questions and built serious confidence in blockchain’s ability to drive large scale transformation,” said David Treat, Managing Director, Global Blockchain Lead, Accenture. “The close collaboration with the DTCC and our alliance partners, Digital Asset and R3, enables us to push DLT performance to new levels against real world requirements and conditions.”
“DTCC has been actively involved in DLT projects for over 3 years and during that time, we have seen technology platforms continue to mature, but concerns have loomed around the scalability of DLT,” stated Rob Palatnick, Managing Director of IT Architecture at DTCC. “This study is a natural next step in our efforts to advance the use of DLT, and we look forward to continuing to work collaboratively with the industry to identify new opportunities to use the technology to enhance the post-trade process.”