Deutsche Börse and Deutsche Bundesbank have issued an optimistic assessment of the use of distributed ledger technology in the management of bank collateral.
The positive sentiment follows the completion of phases I and II of a joint project Blockbaster (Blockchain based Settlement Technology Research), to support the settlement of securities transactions, payments, interest payments and repayments when a bond matures.
"The underlying technology used in the two prototypes appeared to be fundamentally suitable for the live operation of a financial market infrastructure," state the partners.
The joint study elaborates on a model where:
- tokens representing underlying securities and specific related rights are introduced;
- collateral - a specific ISIN or a basket of securities - is mobilized via tokens without any movement in the underlying assets;
- a specific trust function is introduced which secures the interests of the token holder with regard to the physical securities in custody.
Burkhard Balz, executive board member at the Deutsche Bundesbank, says: “From the perspective of the Deutsche Bundesbank, collateral management is fundamentally important for the operational management of monetary policy. DLT-based solutions for collateral management have the potential to increase efficiency in this area by improving the availability of collateral.”
Since the global financial crisis, the importance of collateral and of collateral management services has grown significantly on the back of regulatory requirements and increased risk aversion among market participants. The question of collateral possibly becoming scarce has attracted frequent debate.
Various initiatives are under way in the financial services industry and also in the central banking community to make appropriate collateral available “in the right place at the right time”. The study comes to the conclusion that DLT-based solutions have the potential to support this goal as tokenized securities and baskets substantially improve collateral mobility and unlock further efficiency gains.
Despite the optimism, the actual uptake of a live working model remains a longer-term goal. As the partners note: "DLT-based structures have to be embedded in the existing, highly integrated system landscape of the financial industry, and resilient legal frameworks need to be developed."
Based on the results of the joint research so far, the Deutsche Bundesbank and Deutsche Börse say they intend to press ahead with further trials of the technology.