Deutsche Bundesbank and Deutsche Börse have joined forces in publishing a study on the uses of distributed ledger technology (DLT) or blockchain.
The bank and exchange believe that “DLT solutions can deliver substantial benefits” and “tokenized securities and baskets substantially improve collateral mobility.”
The pro-blockchain report explains:
“There is a general consensus that distributed ledger technology (DLT) has both disruptive and evolutionary potential for financial markets. This paper focuses on potential implications in connection with collateral management activities for financial transactions, the aim being to analyze the challenges and opportunities of DLT in the current regulatory environment for this specific use case.”
Burkhard Balz, Executive Board member at the Deutsche Bundesbank, says from the perspective of his bank 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,” he explains.
Deutsche Börse, as a financial market infrastructure provider, is actively pursuing opportunities generated by the tech.
Jens Hachmeister, Head of New Markets at Deutsche Börse, believes adds:
“It is our core belief that this new and evolving world of distributed networks is another field where institutionalised trust functions delivered by a neutral party remain key to successful market-wide adoption.”
According to the report, 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. Counter-party risk, and the lack of visibility, was one of the biggest variables when the market collapsed during the great recession.
Improving collateral mobility is, therefore, a matter of interest not only for market participants and infrastructure providers, but also for central banks as the largest collateral takers.
The German study comes concludes 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. But integration into the existing patchwork of regulations and established processes will take some time.
Deutsche Börse and the Deutsche Bundesbank report that they have already successfully completed Phase I and Phase II of the joint project called “Blockbaster” or “Blockchain based Settlement Technology Research.”
The two prototypes developed support the settlement of securities transactions, payments, interest payments and repayments when a bond matures. The partners believe that the two prototypes appeared to be “fundamentally suitable for the live operation of a financial market infrastructure.”
Based on the results of the research, both Deutsche Bundesbank and Deutsche Börse intend to continue to work together in exploring the potential offered by distributed ledger technologies.