Capital Brief – Andrew Cornell
Imperium Markets will launch a major research project into digitalising the $3 trillion wholesale bond and deposit market and running it on blockchain.
Financial markets platform Imperium will build on the Reserve Bank’s digital currency pilots to simulate debt market transactions on blockchain with a view to eventually digitising Australia’s $3 trillion wholesale deposit and debt capital markets.
The project is the next significant step in tokenising and decentralising real world assets in the Australian financial system to lower transaction costs and risk, a shift estimated by the RBA at being worth tens of billions a year in savings.
The simulation will span all the wholesale asset classes Imperium Markets already handles for banks, corporates and other institutions, including certificates of deposit, term deposits and bonds.
“Ultimately this is about creating safer, simpler, lower cost markets – and at the moment there is no system, just ad hoc processes,” Imperium chair Rod Lewis told Capital Brief.
The ASX has abandoned plans to use blockchain technology to underpin a renovation of its decades old trading system.
The project, to be conducted with the Digital Finance CRC, the RBA’s partner in its digital currency pilots, is aimed at testing the viability of tokenised debt capital and money markets and measuring the efficiency benefits from reducing manual processes and liquidity and capital requirements.
“These markets, even though they are fundamental to the Australian economy and mediate trillions of dollars a year, are still largely analogue,” Imperium chief executive Stu Burns told Capital Brief.
“Some of these transactions can be on the phone and email, portfolios are on spreadsheets, there’s just been no system, no technology – and we’ve worked in these markets, worked at the banks. It’s a real mess.”
RBA on board
RBA governor Michele Bullock touched on the ambition for tokenisation of the financial system at this week’s AusPayNet summit saying “we are now planning a project that will examine how different forms of digital money and infrastructure could support the development of tokenised asset markets in Australia.”
Tokenisation is essentially the creation of a digital equivalent of a real world asset – which might be a bond or carbon credit – which exists on a distributed ledger such as blockchain. The DFCRC says real world assets available for tokenisation are worth more than $800 trillion – about 800 times larger than the cryptocurrency sector.
As Capital Brief has reported, the RBA has estimated the productivity and cost benefits of tokenisation of capital markets at up to $13 billion a year to issuers in the markets.
Burns said the 18 month to two year project, which will involve major market players such as the banks who are already Imperium clients, is designed to measure the cost reduction and pave a way for participants to move to digitisation by running the blockchain platform in parallel with the established system.
“Because we are simulating real transactions, we can say this is what it cost me today, how many people were involved in settling and managing that transaction today, and what would be required – people, time, collateral, capital – if we did that in a tokenised world?”
While the RBA pilot to test use cases has now finished, real world digital asset issuance is already happening globally, notably in Switzerland.
Atomic settlement
Central to the attraction of tokenised markets is what is known as “atomic settlement”. In current markets, trading, clearing of transactions and finally settlement are different stages. Because there is a risk gap between clearing and settlement, which may be days, capital has to be held against the possibility of failure.
With atomic settlement using a distributed ledger and tokenised assets, clearing and settlement occur simultaneously and irrevocably, removing the need for setting aside capital, and thus improving liquidity.
DFCRC chief executive Andreas Furche, said the project was an opportunity to test and build “transformative digital finance solutions targeting the efficiency improvements in clearing and settlement between wholesale participants, which our recent research work estimates to be in the billions of dollars annually in Australia alone.”
Furche described the project as “field testing” the proposition that the biggest economic impact potential for central bank digital currencies will be in the improvement of wholesale clearing and settlement process, in particular between banks, where settlement must occur in central bank funds.
“The marketplace this pilot is addressing has a very large volume. If the project confirms and operationalises the efficiency improvements our research suggests are available in this space, it will be quite high impact,” he said.
Lewis said “blockchain and distributed ledger technology is really about the simplification of markets. The current processes are slow and complicated, this project aims to demonstrate that tokenisation on distributed ledger technology can democratise access for all participants, connect capital and deliver real-time data so that the markets can reach their full potential.”
Imperium Market already has an ASIC-licensed digital marketplace.
Lewis said the project was also critical to allow regulators such as ASIC and the RBA to ascertain what sort of regulation is applicable in a tokenised marketplace.
The whole idea of the research is for the market to collaborate, that includes the regulators,” he said. “So the RBA would have the opportunity to test its digital currency. If they wanted to do a real money pilot again, we’d make our infrastructure available for that. We’d make it available for banks to test their stablecoins. We are also interested in fully digitally native digital collateral.”
Imperium received a tier 2 financial markets licence from ASIC in 2017 allowing it to create a market for debt securities and has the major banks, corporates, government agencies and other institutions as clients. Clients use the platform to manage debt issuance to institutional investors. It ran one of 14 pilots for the RBA’s central bank digital currency project last year.
Read the full article