Corporate eyes blockchain bond issue
A corporate could issue a bond using a distributed ledger and a smart contract before the end of this year according to Mark Smith, chief executive and co-founder of technology company Symbiont.
Symbiont has developed a platform that allows financial firms to create programmable versions of traditional securities – that it calls Smart Securities – which are stored in the blockchain or a distributed ledger.
The blockchain is a transparent ledger that holds transaction records and is shared by a network, rather than being held centrally. In her book, “Blockchain: Blueprint for a New Economy”, Melanie Swan describes the blockchain as “like a giant interactive spreadsheet that everyone has access to and updates and confirms that the digital transactions transferring funds are unique.”
Smith told Markets Media: “We are in the final mile of registration for a corporate bond smart security, through a bulge bracket firm, that we hope will be issued before end of this year. We are in discussion with the relevant legal and compliance departments, as well as the SEC and Finra.”
This week Symbiont itself issued founders equity, convertible preferred stock, convertible notes and stock options as smart securities on its blockchain. SenaHill Partners, a venture capital backer of Symbiont, has 17 portfolio companies who are also looking at issuing similar securities on Symbiont.
In order to transact on the blockchain users need an address, a cryptographic private key and a wallet software they run on their computer to manage their digital currency. Any asset can be registered in the blockchain and its ownership controlled by the private key. The owner can sell the asset by giving the private key to the buyer.
The asset can be a smart contract – a traditional security converted into code. For example, the interest payments on a bond can be set in code to check a specified source for the rate and the digital currency distributions will be made automatically to all the holders of the bond recorded on the blockchain on set dates.
Swan wrote: “The classic example used to demonstrate smart contracts in the form of code executing automatically is a vending machine. Unlike a person, a vending machine behaves algorithmically; the same instruction set will be followed every time in every case. When you deposit money and make a selection, the item is released.”
For a smart security, settlement takes place as soon as all the specified conditions in the code have been met without any manual intervention.
Smith said: “It changes the paradigm for financial services as you do not need a middle or back office.”
Financial firms could save costs of between $15bn to $20bn a year by 2022 by using blockchain technologies according to a study in June, “The Fintech 2.0 Paper: rebooting financial services,” from Santander InnoVentures, a fintech business set up by the Spanish financial services group; consultancy Oliver Wyman and Anthemis Group, a venture investment and advisory firm.
Smith added: “We are laser-focussed on the financial markets which have the most friction and the lowest transparency.”
For example, syndicated loans can take up to 27 days to settle and the corporate debt market is also opaque. Smith added that the Symbiont platform is ledger agnostic so can incorporate ledgers from other blockchains such as Bitcoin or Ethereum.
The Symbiont platform is not completely open as only regulated broker-dealers can connect to the network and they would be responsible for sponsoring access for their buyside clients.
“Broker-dealers will pay to access the platform but it allows them to make huge cost savings,” added Smith. “They can also deleverage their balance sheets by moving from principal trading to an agency model.”
Last month the European Securities and Markets Authority completed a consultation on virtual currencies and distributed ledgers.
Deutsche Bank said in its response that whilst the technology associated with distributed ledgers is still in its infancy it offers potential benefits including more stable and resilient systems, faster processing of transactions and lower costs for bank customers.
The bank gave examples of blockchain technology being used outside the sphere of virtual currencies such as Estonia, which reports the lowest rate of credit card fraud in the Eurozone, and secures much of its banking infrastructure with a blockchain.
Deutsche Bank has also set up innovation labs. It said: “Under this initiative, one of the areas where there has been early focus is exploring the potential commercial applications of distributed ledger and blockchain technologies.”
The bank’s early analysis has identified a number of potential uses of blockchain technology such as securities issuance and transfer including the creation of unique identifiers, transaction tracking and asset segregation; securities clearing and settlement; asset servicing through automation of dividend/interest payments and corporate actions processing, enforcing derivatives contract and improving derivatives clearing through smart contracts.
CME Group said in its response to Esma that its subsidiary, CME Ventures, makes minority stake investments in early stage technology companies include those involved in virtual currencies and distributed ledgers.
The exchange said: “In addition to digital currency being a potential new fiat currency, digital currency presents the opportunity for a number of related products such as indices and derivatives, and blockchain as a technology to create a universal ledger.”
The CME also pointed out that some digital currency organizations like Ripple do not use the blockchain but rely on consensus algorithms instead.
The exchange said the blockchain technology is an excellent method for recording documents.
“The concept of coloured coins or digital assets can just as easily represent traditional assets, such as stocks, bonds, and real estate, instead of digital currency- based assets,” added the CME. “Parties can transfer these directly with each other, or via an exchange matching buyers and sellers. Proof of ownership of the private key can be used to prove ownership of the underlying asset.”
The exchange noted that development is progressing very quickly. “From 2014 to 2015, we have observed leaps in the industry’s attention to digital currencies and ledger technology issues. Should this progress continue at a similar pace, we may see mainstream adoption of these technologies within a short period of time,” said the CME.
The regulated blockchain infrastructure platform announced the sixth broker-dealer to join.
The proof of concept uses smart contracts from Digital Asset and DLT from VMware.
The network is driving adoption of standardized post-trade swap data models and workflows.
The market maker will contribute real-time crypto market data before expanding into equities.
Pyth is built on a blockchain to handle receipt and distribution of fast-moving data.