Swiss banks advance tokenisation PoC as foundation for alternative financial infrastructure
13 December 2022 Switzerland
Image: adobestock/paketesama
Three Swiss banks, Credit Suisse, Pictet and Vontobel, have completed a proof of concept confirming their ability to issue, trade and settle tokenised investment products on a public blockchain, to trade these on exchange and to settle these directly between participants on blockchain.
The proof of concept included the issuance of tokenised investment products recorded on an Ethereum-based test blockchain and trading in these products on a regulated Swiss securities exchange, BX Swiss.
These trades were settled using a smart contract developed by the Capital Markets and Technology Association (CMTA) and another smart contract that replicates delivery-versus-payment (DvP) functions available in traditional settlement systems. The tokenised securities settled against CHF fiat currency via a DLT2Pay payments bridge.
The participants indicate that these three distinct stages of the investment product lifecycle, issuance, trading and settlement, each took place within several hours of each other, whereas these would take days to complete in a traditional financial infrastructure environment.
They indicate that the proof of concept (PoC) lays the preparations for an alternative Swiss post-trade infrastructure functioning without central counterparty or central securities depository, enabling reduced cost and complexity and additional security across the securities transaction value chain.
In the trial, Credit Suisse issued a structured note and Pictet and Vontobel each issued an actively managed certificate representing a basket of equities, with the digital tokens recorded on an Ethereum test blockchain.
Settlement in CHF fiat currency was enabled through DLT2pay, a payments application offered by German digital finance, compliance and artificial intelligence specialist targens, which linked the Ethereum blockchain to the real-time gross settlement payments system of the Swiss National Bank.
Taurus, the Geneva-based digital asset and blockchain company, provided the technology to manage the creation, technical operation and security aspects of the smart contracts, and to issue and manage the structured products across their lifecycle.
The PoC was led by CMTA, with support from the companies already mentioned, along with METACO, Lenz and Staehelin, and UBS.
Credit Suisse head of digital assets Daniel Gorrera says: "The transactions carried out today clearly establish that products tokenised on a public blockchain can be traded on regulated trading platforms and that the settlement of transactions on tokenised products can be carried out in fiat currencies without creating any counterparty risk. The successful proof of concept is a crucial first step for unlocking the benefits of tokenisation in the future."
Steve Blanchet, head of group technology strategy and innovation at Pictet, says: "Tokenisation is a key strategic element for the future of asset management. It enables issuers to streamline the processes that govern the creation of investment products in a way that is currently not achievable with traditional infrastructures, and to drastically reduce time-to-market.
“With the solutions we tested in the proof of concept, processes that are currently matters of days can be reduced to a few hours, and eventually down to minutes or less."
Marco Hegglin, Vontobel’s chief of staff for structured solutions and treasury, says: "This proof of concept is just a first step on the way to defining a new standard for structured products in the form of a smart contract. Structured products are not only innovative products, they are also predestined for state-of-the-art technology.
“With a fully automated smart contract covering the entire lifecycle, the possibilities that can be expressed in pure code language are almost unlimited and the blockchain technology can help [in] designing new generations of financial products."
Matthias Müller, head of markets at BX Swiss, adds: "(The) first of its kind, this proof of concept demonstrated that trades carried out on-exchange can be settled on a public blockchain directly between participants. It is no longer necessary for the parties to secure a transaction by transferring tokens or cash to the exchange ahead of trade.
“This is a significant advantage in terms of speed, cost, and risk management. The smart contract used for the settlement eliminates the counterparty risk that would exist if the cash leg and the asset leg of the transactions were completed independently from one another. The new regulatory regime for DLT-based trading platforms will allow BX Swiss to take full advantage of these developments."
The proof of concept included the issuance of tokenised investment products recorded on an Ethereum-based test blockchain and trading in these products on a regulated Swiss securities exchange, BX Swiss.
These trades were settled using a smart contract developed by the Capital Markets and Technology Association (CMTA) and another smart contract that replicates delivery-versus-payment (DvP) functions available in traditional settlement systems. The tokenised securities settled against CHF fiat currency via a DLT2Pay payments bridge.
The participants indicate that these three distinct stages of the investment product lifecycle, issuance, trading and settlement, each took place within several hours of each other, whereas these would take days to complete in a traditional financial infrastructure environment.
They indicate that the proof of concept (PoC) lays the preparations for an alternative Swiss post-trade infrastructure functioning without central counterparty or central securities depository, enabling reduced cost and complexity and additional security across the securities transaction value chain.
In the trial, Credit Suisse issued a structured note and Pictet and Vontobel each issued an actively managed certificate representing a basket of equities, with the digital tokens recorded on an Ethereum test blockchain.
Settlement in CHF fiat currency was enabled through DLT2pay, a payments application offered by German digital finance, compliance and artificial intelligence specialist targens, which linked the Ethereum blockchain to the real-time gross settlement payments system of the Swiss National Bank.
Taurus, the Geneva-based digital asset and blockchain company, provided the technology to manage the creation, technical operation and security aspects of the smart contracts, and to issue and manage the structured products across their lifecycle.
The PoC was led by CMTA, with support from the companies already mentioned, along with METACO, Lenz and Staehelin, and UBS.
Credit Suisse head of digital assets Daniel Gorrera says: "The transactions carried out today clearly establish that products tokenised on a public blockchain can be traded on regulated trading platforms and that the settlement of transactions on tokenised products can be carried out in fiat currencies without creating any counterparty risk. The successful proof of concept is a crucial first step for unlocking the benefits of tokenisation in the future."
Steve Blanchet, head of group technology strategy and innovation at Pictet, says: "Tokenisation is a key strategic element for the future of asset management. It enables issuers to streamline the processes that govern the creation of investment products in a way that is currently not achievable with traditional infrastructures, and to drastically reduce time-to-market.
“With the solutions we tested in the proof of concept, processes that are currently matters of days can be reduced to a few hours, and eventually down to minutes or less."
Marco Hegglin, Vontobel’s chief of staff for structured solutions and treasury, says: "This proof of concept is just a first step on the way to defining a new standard for structured products in the form of a smart contract. Structured products are not only innovative products, they are also predestined for state-of-the-art technology.
“With a fully automated smart contract covering the entire lifecycle, the possibilities that can be expressed in pure code language are almost unlimited and the blockchain technology can help [in] designing new generations of financial products."
Matthias Müller, head of markets at BX Swiss, adds: "(The) first of its kind, this proof of concept demonstrated that trades carried out on-exchange can be settled on a public blockchain directly between participants. It is no longer necessary for the parties to secure a transaction by transferring tokens or cash to the exchange ahead of trade.
“This is a significant advantage in terms of speed, cost, and risk management. The smart contract used for the settlement eliminates the counterparty risk that would exist if the cash leg and the asset leg of the transactions were completed independently from one another. The new regulatory regime for DLT-based trading platforms will allow BX Swiss to take full advantage of these developments."
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