Big banks like J.P. Morgan Chase & Co and Citigroup Inc. recently conducted tests of the bitcoin-connected technology for keeping records on credit-default swaps, which could increase bitcoin popularity in the financial area.
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The swaps are insurance instruments paying off if a bond fails, and the finding of the over-the-counter contracts might be a problem. Banks connect future sellers and buyers, transfer the trades by a service led by Markit Ltd. and dispatch this data to Depository Trust & Clearing Corp (DTCC), central bookkeeper at Wall Street.
The latest probation period has shown that the major part of this record-keeping process is fulfilled with ‘blockchain’ technology.
DTCC is going to decide if the results are good enough for implementation of this technology in live trading or for credit-default swaps which corresponds to trillions of dollars.
One of DTCC leaders, Chris Childs, says that he is not ready to make final conclusions from the results, but they seem good enough for now.
The recent test was aimed at verifying the usage of blockchain technology in a Wall Street trading context. At the same time, Bitcoin itself has severe legal problems, with general turbulence revolving around it, but it has proven to interest the financial world greatly.
Banks has lately invested significant amounts of money and manpower in finding ways of using private blockchains to (or “intending to”) cut future costs.
Barclays PLC, for instance, has agreed to a partnership with Circle Internet Financial Ltd, a bitcoin company, so as to use Circle’s digital money application.
Autonomous Research experts say that it is possible to save about a third of costs of setting trade by using blockchain, bringing savings of up to $16 billion a year. Citigroup has published a report predicting that such automation may cut two million employees from banking in the next decade.
This test simulated a monthly volume of trade in the credit default swap market, equal to $6.7 trillion in face value of contracts. Electronic CDS agreements stored on different individual servers will be substituted with a record on a conventional blockchain network.
Among the participants of this test were Credit Suisse Group AG and Bank of America Corp. as well as other huge banks and also Axoni, a startup trying to integrate bitcoin technologies to the banking world.
Markit Ltd., a data provider, currently has 6 active projects with blockchain technology. However, the CDS test is the most representative, according to Markit’s vice president Jeffrey Billingham.
Live usage of blockchain technology in trading might be possible in the far future. Depository Trust & Clearing Corp plans to research if banks and regulators are interested in this technology.
Currently regulators, among which are the Federal Reserve, the Exchange Commission and the Commodity Futures Trading Commission, suggest that further examinations of the blockchain technology are needed.
Recently DTCC announced its new partnership with Digital Asset Holdings LLC, a venture created by former J.P. Morgan employee Blythe Masters, to test if repos (short-term lending arrangements) can be resolved with blockchain technology.