One of the largest institutional trading networks in the world has revealed details to CoinDesk about its plan to move the vast majority of its post-trade services to a blockchain.
To maximize the current technological ability of using a shared, distributed ledger, or blockchain, the Frankfurt, Germany-based Deutsche Börse Group decided to focus its efforts solely on post-trade settlement. Following a lengthy analysis of its own internal ecosystem of products that include the Eurex exchange, the Xetra exchange and the Clearstream central securities depository, the conglomerate developed a three-prong plan of attack.
As revealed to CoinDesk, Deutsche Börse has opted to ignore the trading side of its services, for now. It's currently focused almost exclusively on creating a system, using Hyperledger’s open-source Fabric protocol, to transfer securities, move commercial bank money and ensure cross-jurisdictional compliance while doing so.
Dubbed the "three pillars," these projects are being implemented by Ashwin Kumar, Deutsche Börse's global head of product development, who also oversees a wide range of other products.
In conversation with CoinDesk Kumar explained step-by-step how the company, which last year generated €1.1bn in revenue settled on this game plan, along with what’s next for each of the projects.
Three pillars of blockchain
Last year, in an effort to bring it's securities offerings to a blockchain, Deutsche Börse partnered with Germany’s central bank, Deutsche Bundesbank. Originally publisized in November 2016, the first phase of the resulting prototype showed how securities could be transmitted as tokens similar to bitcoin.
Since then, the project has advanced to its second phase, being developed into a production-ready system which Kumar expects will be completed in the next four months. From there, Deutsche Börse plans to initiate the process of formalizing its relationships with early users by granting them credentials to the permissioned, distributed network.
"There’s a lot of interest," said Kumar. "At the end of the day, to the best of my knowledge, this is the only commercial organization working with a central bank and addressing this."
The second project, originally revealed this January, is designed to move commercial bank money onto a blockchain.
Built in collaboration with Deutsche Börse Group’s susidiary, Eurex Clearing, the collateralized coin effort called “Collco” is being designed to move the institution's margining requirements, credit risk free payments and delivery-versus-payment asset/value transfer to a blockchain.
Deutsche Börse has completed an early prototype for this product capable of transacting payment for almost any related purpose, including, settlement, custody and collateral management.
"Most importantly, these coins can then be leveraged by the bank, depending on the credit appetite," said Kumar. "We replicated the commercial bank concept."
Now that the prototype is complete, the financial firm is in discussions with local German banks and other banks around the world that might be interested in incorporating what is being positioned as a more efficient commercial banking system.
The third project currently underway at Deutsche Börse is being conducted in collaboration with the Liquidity Alliance, a group of international central securities depositories founded in January 2013. With membership including Australia’s ASX, Brazil’s Cetip, Spain’s Iberclear and South Africa’s Strate, the alliance is working together to build a prototype that moves securities from jurisdiction to jurisdiction in a compliant way.
For each jurisdiction, the corresponding Liquidity Alliance member is working with the appropriate regulators to integrate a blockchain node in a compliant way. Deutsche Börse is specifically working with the Bundesbank and BaFin, Germany’s federal financial supervisory authority which works mostly with asset managers and investment funds.
"What we’re doing now is we’re engaging with our local regulators and each other to figure out how we can create a regulatory and legal framework whereby this can become an operational product,” Kumar said.
Still experimenting and learning
Working on these projects are a team of seven full-time blockchain engineers and about 20 employees from the institution's risk departments and elsewhere to work on these pillars from a Frankfurt-based laboratory.
In addition to building out the Hyperledger Fabric platform, the Deutsche Börse team is experimenting with R3’s Corda platform, and are in the early stages of looking into SETL’s blockchain technology.
Initially, Deutsche Börse focused its blockchain efforts on building prototypes centered around the redemption and creation of mutual funds, as well as blockchain proxy voting services which are increasingly proving to be a popular early blockchain use case around the world.
But after several early prototypes were constructed, the firm "took a step back" and looked at its entire ecosystem of services from trade to settlement. Unlike blockchain technologies as Medici’s tØ platform which is being built from the ground up so that the trade is the settlement, Deutsche Börse focused exclusively on settlement.
Blockchain technology as it currently exists doesn't meet several criteria Kumar said his company requires for its trading platform. Specifically, he said "it doesn’t have the latency requirements [and] the scalability requirements, that we need."
Although, Kumar continued, once the settlement products the institution is working on are adopted by clients, new use cases could be built into a single, integrated network in the future. He concluded:
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