Another frontier for application of blockchain distributed ledger technology could be shortening the settlement cycle for trades, says an executive at Paxos, the blockchain technology company that completed a pilot program with Euroclear in December for gold transaction settlement.
Paxos is planning to roll out its gold transaction settlement capabilities more widely in 2017, building on its Euroclear Bankchain effort, according to Rajesh Nair, vice president of engineering at Paxos. More broadly, blockchain can disrupt middle and back office functions, not just front-office and trading functions, adds Nair.
“T+3 [trade date plus three] settlement means you’re locking up all the capital for three days,” he says. “When you do instantaneous settlement, you unlock all that capital. … The fact that we still need three days to settle a trade is just not sustainable as a processing constant. We’re striving for near real-time settlement. If we’re highly successful at what we’re trying to do, then as a first a trade and the settlement will be the same day. The endgame is to say the trade and settlement are the same thing.”
By creating a delivery-versus-payment transaction and record that is agreed upon by both parties to a transaction, reconciliations become unnecessary, explains Nair. “Blockchain enables you to skip reconciliations, because you have a copy of that same database that everybody has,” he says. “So there are no reconciliation costs. Blockchain itself reconciles everything. That has the potential to reduce a whole slew of costs from the back office.”
Paxos’ Bankchain service is built to be interoperable through APIs or FIX and Swift connections. Paxos has a market advisory group in which users (including some Tier 1 firms) provide feedback on its services. “They can advise us what’s wrong with it and see how it integrates with existing systems,” says Nair. “We use the feedback to refine the product.”