The regulated use of a blockchain-powered platform, combined with fundamental process change, can increase needed transparency, traceability, and access to fixed income markets.
Innovation within the Regulatory Framework
Blockchain is a form of distributed ledger technology. It is a peer-to-peer distributed database network containing digital ledger records of all regulated bond attributes, transactions, and events occurring in the system. It provides verified copies of the entire ledger on each peer, thereby validating the integrity of the data.
DATA LINEAGE // The creation of an immutable security master block starts at the point of origination.
Ledger record management in the regulated financial system (i.e., how financial institutions comply with recordkeeping requirements) has evolved as technological solutions have been developed. With the introduction of widespread computer infrastructure, paper ledgers for required books and records were replaced by electronic ledgers. The move to electronic ledgers allowed for efficient file sharing and data comparisons relative to paper and helped resolve the "Paperwork Crisis" in the 1960’s. The financial system has used electronic ledgers for recordkeeping for the past 50 years. However, the proprietary nature of electronic ledgers results in significant reconciliation requirements because each participant in a transaction keeps their own separate ledger. Just as the transition from paper to proprietary electronic ledgers enabled efficiencies, the transition from proprietary electronic ledgers to distributed ledgers will do the same. The transition will enable data sharing (with permissioned access) and eliminate the need to reconcile data across multiple ledgers. In that context, verification of original records is critical.
To verify events, the blockchain process uses multiple encryption keys per transaction; every event is an immediate, immutable, and permanent cryptographic record. The ledger is distributed across several peers, replicated, and stored instantaneously on each peer across the system. When a transaction event occurs, details such as price, asset, and ownership are recorded, verified, and settled across all peers. Since an authorized and verified change is transparently and permanently recorded across all peers, there is no need for third-party verification.
SINGLE SOURCE OF TRUTH // Regulated participants can manage shared and immutable records.
Transition to Blockchain Infrastructure
The transition to permissioned blockchain infrastructure in the financial system opens a unique window of opportunity to apply first principles thinking to the system itself.
Simply applying blockchain technology to the system as it exists would produce results that fall short of the potential value. Furthermore, that approach would cement existing frictions and inefficiencies for the foreseeable future. By applying blockchain technology along with first principles thinking on systems and process design, there is the potential to unleash a number of positive outcomes – greater transparency, traceability, and expanded access.
At Alphaledger, our first principles approach starts with observing current conditions related to general technology capabilities, market dynamics, and cost structures:
- Modern technology enables straightforward and low-cost communication of complex information.
- Capital market participants are comfortable transacting on digital platforms.
- The existing fixed cost base at origination can be addressed via technology.
- Digitization enables efficient small transaction size, which is key to open access.
- The term nature of fixed income, combined with the high number of new bonds created each year, enables the creation of digitally native bonds that will live their entire lives on blockchain infrastructure.
To fully capture the value of blockchain technology for market participants, we have taken a first principles approach to the design of our platform and consider the lifecycle of debt instruments from issuance to maturity. By starting with blockchain-based security masters at issuance, we can envision a fully on-chain life for debt instruments, defining the full life cycle of T-Now™ tokenized debt - from origination, T-Now™ settlement, distribution, on-chain events (coupon payments, maturity payments, calls), clearing, and custody*. This approach allows us to address deeply rooted inefficiencies and establish a more effective infrastructure for all market participants.
For a deep dive into blockchain technology, refer to IBM's "What is Blockchain".
* Future roadmap, regulatory approval required.
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