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Digital Insights & Trends: Clearing and Settlement Platforms to Watch in 2016
2015 was the year that blockchain technology, initially used as the public ledger for tracking bitcoin, began to mature and expand beyond payments. While regulators focused on the risks associated with virtual currency, technology companies and financial institutions forged ahead with developing alternate uses for the blockchain.Using blockchain technology offers many upsides, with one of the most notable being faster clearing and settlement functionality. Companies that can clear and settle transactions faster and at a reduced cost will have a competitive advantage. Thus far, however, no dominant player has emerged.
There are a number of companies that are working on creating blockchain platforms for financial institutions to use to clear and settle trades. Below are just a few of note:
- Digital Asset Holdings. Blythe Master and team are developing a blockchain platform for financial institutions to use to settle digital currency trades as well as digitized versions of financial assets. Digital Asset Holdings recently purchased Hyperledger, which developed a distributed ledger to allow banks and other financial institutions to clear and settle transactions in real time, and Blockstack, which offers private blockchain services.
- Ethereum. Launched in mid-2015, it offers its own decentralized blockchain platform that allows each blockchain to be customized to fit the specific security that is subject to clearance and settlement.
- Bankchain. Developed by ItBit, it is a ledger system seeking to leverage the blockchain for clearing, settlement, and custody.
- Clearmatics is working with UBS to help develop a digital coin based on blockchain technology to settle trades and make cross-border payments.
- R3CEV has developed a consortium of 42 banks dedicated to developing blockchain technology for settlements and payments, among other things.
- Citigroup is developing various blockchain technologies (at least three) and has created a test virtual currency, “Citicoin,” which it uses to test the blockchain technologies.
In addition, companies are using blockchain technology to issue and trade equities. At the end of 2015, Nasdaq issued shares in Chain.com using Nasdaq Linq, its blockchain ledger technology. Additionally, the SEC approved Overstock.com’s plan to issue company stock via blockchain through its subsidiary, t0.
As the above demonstrates, both technology companies and financial institutions will be focused on developing numerous use cases for blockchain technology beyond payments in 2016. Regulators are also beginning to focus on the blockchain technology itself as opposed to solely virtual currency. For example, the CFTC is holding a hearing on January 26, 2016 to discuss the use of blockchain technology in derivatives markets. Taken together, 2016 seems to be the year that blockchain technology separates itself from payments and begins to stand on its own. Judging by the CFTC’s interest in blockchain technology, it appears that regulators may be thinking the same thing.
For another retrospective on the blockchain in 2015, see our Coindesk article "The Stories That Shaped the Blockchain Narrative in 2015."
Digital Insights & Trends: It's All About the Blockchain
Just returning from a blockchain workshop in London, where I worked with a number of incredible people to consider solutions to some of the pressing regulatory issues impacting the blockchain technology. While considering these issues I wondered if Bitcoin had gained popularity solely as a protocol and not as a currency, would it have evolved faster and more readily. The almost instantaneous (compared to current standards) transfer of value across the globe would be just one component of the potential possibilities for the technology as recognized by the mainstream public. A secure ledger of property ownership, notarization, recordation of wills and trusts, claims for corporate names and intellectual property – all would be pursued at a much faster, or perhaps more public, pace. Currently, progressive financial institutions have announced their active experiments with the technology, while others quietly research the potential use cases.
The opportunities for developing a cryptographic, distributed, public ledger are endless, rendering predictions for the future, even 5 years from now, difficult. What is clear is that the way we conduct financial transactions will be forever altered – for the better. Payments and payment systems will be more efficient, secure, faster, and less expensive for all in the ecosystem and will also lead to financial inclusion. Government regulation – while antithetical to the original thesis of the Bitcoin protocol – is a necessary component of the “algorithm” as the protection of the public from acts of terrorism and other crimes is in everyone’s interest. So let’s work with it, think creatively about it, and help prepare the protocol, governments and the public for the next 5 years.
Kansas Bank Commissioner Issues Virtual Currency Guidance
On June 6, the Kansas Office of State Bank Commissioner (OSBC) issued guidance on the regulatory treatment of virtual currencies under the Kansas Money Transmitter Act (KMTA). The guidance focuses on money transmission activities involving decentralized cryptocurrencies, such as Bitcoin. The guidance states that cryptocurrencies in their current form are not covered by the KMTA because they do not fall within the definition of “money”—no cryptocurrency is currently authorized or adopted by any governmental entity as part of its currency—or “monetary value”—there is no recognized standard of value or set value for a single unit of a cryptocurrency. The guidance explains that since the KMTA does not apply to transmission of decentralized cryptocurrencies, an entity engaged solely in the transmission of such currency is not required to obtain a money transmitter license. The guidance adds that, if transmission of virtual currency includes the involvement of sovereign currency in a transaction, it may be considered money transmission depending on how the transaction is organized. The guidance provides several examples of common types of transactions involving cryptocurrency and whether the KMTA applies to each, and outlines for cryptocurrency businesses that conduct money transmission, and entities engaged in money transmission, actions necessary to comply with state law, including licensing.
Texas Issues Licensing Guidance For Virtual Currency Firms
On April 3, the Texas Department of Banking issued a supervisory memorandum on the regulatory treatment of virtual currencies under the Texas Money Services Act. The memorandum states that money transmission licensing determinations regarding transactions with decentralized virtual currencies such as Bitcoin, referred to by the Banking Department as cryptocurrencies, turn on whether cryptocurrencies should be considered "money or monetary value" under the Money Services Act. The memorandum concludes that cryptocurrencies currently cannot be considered “money or monetary value” because they are not currencies as that word is defined in the Money Services Act, and a unit of cryptocurrency is not a claim under the Act. However, when a cryptocurrency transaction includes sovereign currency, it may constitute money transmission depending on how the sovereign currency is handled. The memorandum provides examples of common types of transactions involving cryptocurrencies and whether they would constitute money transmission subject to state licensing requirements. For example, the Department states that exchanging cryptocurrency for sovereign currency through a third party exchanger is generally money transmission, and that exchange of cryptocurrency for sovereign currency through an automated machine is usually but not always money transmission. The Department advises that cryptocurrency businesses conducting money transmission must comply with state licensing requirements. The Department further advises that (i) a money transmitter that conducts virtual currency transactions is subject to a $500,000 minimum net worth requirement; (ii) a license holder may not include virtual currency assets in calculations for its permissible investments; and (iii) license applicants who handle virtual currencies in the course of their money transmission activities must submit a current third party security audit of their relevant computer systems.
