This article was originally published in Global Investor and can be found here.
Euroclear joins a bank-backed blockchain payment system: What this means for crypto tech and the financial market
Manoj Mistry, Managing Director, IBOS Association
As Distributed Ledger Technology (DLT) continues to grow in scope and scale, its use is becoming ever more widespread among diverse financial institutions – from improving their clearance and settlement mechanisms to enabling speedy payment processing services and matching growing customer expectations for more personalized, digitized services by enhancing the customer experience.
Euroclear, the Belgium-headquartered international securities settlement house, is among the most recent of them to take the plunge through a small strategic investment in the regulated blockchain payments consortium, Fnality International – formerly Utility Settlement Coin (USC) – which is primarily comprised of global banks.
The impetus of developing and investing in DLT is reinforced by new initiatives from assorted regulators to create the right conditions for its use in securities markets, such as the EU DLT pilot regime: a sandbox for tokenised securities and settlement that focuses on the tokenisation of conventional financial instruments such as stocks, bonds and UCITS.
Last year, the Bank of England approved a new type of account at the central bank to cater for a broader range of anticipated payments systems, including those based on blockchain. In parallel, there is an increasing acceptance of DLT by market participants who recognise its potential to achieve a transformation of global capital markets.
Euroclear currently offers settlement as an intermediary clearing agent for stock and bond trades: cash is swapped for the legal ownership of an asset at the conclusion of each transaction. It also provides settlement and custody of domestic and cross-border securities for bonds, equities and derivatives to investment funds.
Owned by a group of banks and exchanges, which includes Euronext and the London Stock Exchange Group, Euroclear revealed that it settled nearly €1000 trillion in securities last year. Its investment in Fnality is designed to develop its future DLT capabilities for stock and bond trades.
The focus of its new partner is to build a blockchain-based payment system that supports the adoption of tokenised assets and marketplaces. With a global roll-out anticipated to start this year, Fnality’s network of distributed Financial Market Infrastructures (dFMIs) will aim to provide a near real time settlement capability in a central bank money-like digital cash asset while simultaneously facilitating compatibility and interaction with other platforms.
Established in 2019, Fnality’s founding shareholders are: Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, ING, KBC Group, Lloyds Banking Group, Mizuho Bank, MUFG Bank, Nasdaq, State Street Corporation, Sumitomo Mitsui Banking Corporation, and UBS.
By using DLT, Fnality can offer central banks a system for managing payments that it describes as simpler, faster, safer, and more resilient. Euroclear’s investment will have a positive impact on meeting Fnality’s objectives: to digitalise the process by removing paperwork and use digital versions of currencies instead.
Through its stake in Fnality, Euroclear will hope to settle tokenized assets, or digital securities, against digital cash in a faster, more efficient way. Its contribution to Fnality will inevitably help to expand the consortium’s footprint in financial market infrastructure. The positive implications for the execution of Fnality’s business are self-evident, according to its CEO, Rhomaios Ram.
For Euroclear, this strategic move will provide what it describes as ‘an innovative solution for the settlement of digital securities against digital cash on DLT.’ The ultimate aim is to increase speed and efficiency for assorted post-trade operations – from primary market issuance to secondary market and collateral trades, and servicing interest payments.
The engagement with Fnality is also part of Euroclear’s continuing development of its DLT capabilities. Last October, a Euroclear-led consortium successfully experimented with a central bank digital currency (CBDC) for settling French treasury bonds on a test blockchain. Commissioned by the Banque de France, the French market experiment confirmed that blockchain technology is suitable to manage post-trade market operations in CBDC.
The benefits for Euroclear are also self-evident, not least that the leverage of DLT will open more doors with the provision of enhanced product and liquidity options on a real-time basis. It is certainly a step in the right direction.
Looking ahead, the focus on Real-Time Gross Settlement (RGTS) should be interesting, especially when combined with Continuous Linked Settlement (CLS). Notably, this also may be a potential threat to the offering that CLS provides to its current members, especially in relation to RTGS and the clearance of FX obligations.