Capital markets blockchain weekly roundup

Our weekly list of announcements about how capital markets and regulators are engaging with digital assets.

Crypto fund Incrementum’s report compares Libra v XRP in global currency competition

Corporations like Revolut, Transferwise, Ripple, Facebook, Amazon, Google, and JP Morgan are all competing for a part of the business for creating and transacting cryptocurrencies. Meanwhile, startups are launching stablecoins, which adds an additional layer of competition with its own set of advantages and risks. Traditional financial intermediaries are faltering in response.

In this edition, crypto fund Icrementum features separate chapters which extensively cover XRP (Ripple) and Libra (Facebook). Effectively, both technologies are competing for the same goal: They want to become a global currency. This means they are both competing with the US dollar.

One thing to note is how much backlash Libra has received from regulators in comparison to XRP. This may be because XRP is not actually considered capable of achieving their stated goal. First, XRP does not have access to Facebook’s network of 1.7 billion users. Second, Facebook’s Libra is intended to have a stable purchasing power, which is absolutely required in order to gain adoption as a medium of exchange and unit of account.

Libra will be backed by reserve assets, such as fiat currency and government bonds, and should therefore be able to maintain a low volatility. In contrast, XRP is backed by nothing. The price of XRP is based purely on speculation. However, the fact that XRP’s network is smaller than Libra and XRP’s volatility is higher than Libra’s does not take XRP out of the race to become a global currency.

The main point is that if XRP was able to back their currency with financial assets and stabilize the purchasing power of the currency, then that would mean that XRP coins should have no price appreciation. In fact, only the equity shares of Ripple Labs would profit from XRP’s adoption as a global reserve currency. But Ripple Labs is a privately held company. After fully understanding what XRP is, one is left seriously questioning the investment case for the XRP.

50 years after the breakthrough discovery of asymmetric encryption and the internet, a race to create the optimal form of money has begun, and, so far, there are three main contenders: state-issued monies, corporate-issued monies, and decentralized cryptocurrencies. The outcome depends on trust. Even though the US dollar has a lot of weak points, do we really trust Libra or XRP more? In case we don’t, trustless monies like Bitcoin and gold offer an exit option.

Read the full report

FCA provides clarity on current crypto assets regulation

The Financial Conduct Authority published final guidance that sets out the regulated cryptoasset activities in response to the UK regulator’s consultation published earlier this year. The Guidance will help firms understand whether their crypto asset activities fall under FCA regulation so they have a better understanding of whether they need to be authorized and what they need to do to ensure they are compliant.

Christopher Woolard, executive director of Strategy and Competition at the FCA, said in a statement: “This is a small, complex and evolving market covering a broad range of activities. Today’s guidance will help clarify which crypto asset activities fall inside our regulatory perimeter.”

The majority of respondents supported the proposals outlined in the consultation. The FCA is therefore publishing the Final Guidance as consulted on with some amendments to provide greater clarity on what is and isn’t regulated. This includes making the important distinction as to which crypto assets fall inside the regulatory perimeter clearer.

Read the full release and access the guidance

Forbes: how SGX is investing in a blockchain future

Blockchain is a frequently misunderstood technology, yet it is also one of the most promising areas of innovation today for specific use cases that involve transactions at scale. Smart contracts and distributed ledgers (DLT) have great potential to fundamentally transform capital markets, making financial transactions and processes more transparent, resilient, and less costly, writes Peter Shen, SGX’s head of Technology Strategy and Innovation in Forbes.

SGX has conducted significant experiments with blockchain technology. Operating a blockchain infrastructure in a highly regulated and mission-critical environment is a daunting prospect. Working with the Amazon Web Services (AWS) Professional Services team, SGX’s team were able to move its existing Hyperledger Fabric application to Amazon Managed Blockchain within days. Amazon Managed Blockchain eliminates much of the effort required to configure and manage the blockchain infrastructure stack.

With electronic trading, exchanges have digitalized information and some of the transaction workflows. Blockchain could be the breakthrough that will digitalize the trust itself, codifying rights and obligations in a consistent and coherent way, creating a truly digitalized marketplace end-to-end.

Blockchain settlement project Ubin

SGX has been collaborating with the Monetary Authority of Singapore (MAS) on Project Ubin, a series of industry-level projects to explore the use of blockchain for digital money in the clearing and settlement of payments and securities. Last year, SGX led the development of Project Ubin DvP. DvP stands for delivery versus payment transactions and is a clearing and settlement mechanism. It applies when payment is required before or upon delivery of a security.

Today, the DvP process requires information to go back and forth across disparate systems and many parties. With Project Ubin DvP, SGX’s team have successfully achieved interledger connectivity and settlement finality, proving DvP of a digital currency and a tokenized asset on two separate ledgers, on a trade-by-trade basis, such as digital Singapore Dollar against Singapore Government Bonds and Chinese Depository Receipts.

The Ubin DvP prototype design allows a trusted Recognized Market Operator (RMO) such as SGX to maintain a pivotal role to monitor and facilitate the network, and also enable the participating financial institutions to join the same blockchain network with the ability to share a common, transparent ledger for processing trade-related transactions efficiently.

In Singapore’s context, SGX, together with the industry, has recently moved from T+3 to T+2, shortening the settlement cycle by simplifying post-trade settlement processes and reducing risk exposures. Blockchain could help to compress the settlement cycle even further for specific asset classes, while also retaining the flexibility to provide for variable settlement cycles in accordance to market demand and regulatory requirements.

Challenges Ahead

The underlying concepts of blockchain and distributed ledgers have been proven to work very well for suitable use cases. Although there is a lot of evidence to suggest that the industry is on the brink of finding the way forward, certain challenges remain ahead before blockchain can become accepted as a mainstream technology, specifically in financial markets. These fall into three broad categories, listed in increasing order of difficulty: technical capability, regulatory acceptance, and adoption.

The technical challenges of developing stable, deterministic, and consistent consensus mechanisms are gradually being resolved. We have also seen the results of recent tests that demonstrate a blockchain network’s ability to handle high transaction workloads. Encryption alone is not enough to address data privacy, so new techniques are being developed. Using Hyperledger Fabric as an example, channels and private data collections can secure transactions between parties such that the data is not exposed to all members in the network. Services like Amazon Managed Blockchain make it easy to create and operate networks, lowering the bar for experimentation and adoption for critical systems.

Depending on the jurisdiction, the codification of rights and obligations into smart contracts will require a different regulatory paradigm. Some of this is not directly related to blockchain, but broader digitalization as a whole. For example, the legal requirement for wet signatures for certain transactions will limit the functionality of smart contracts. Others are directly related to the effective governance and control of digital money and assets. One thing is certain: supervision and oversight of blockchain networks place a much higher premium on the technical competency of all parties involved.

Adoption is a much more challenging problem for financial markets. Today, there are no established standards for blockchain technology. While many industry working groups are trying to form an agreed operating standard, no real consensus has been achieved, partly due to competing interests and also a general lack of common understanding as to what blockchain can and cannot do. In many ways, interoperability becomes much more significant than outright standardization, as it is quite evident by now that there will be many blockchain networks, each serving a specific purpose for a specific customer group. However, based on SGX’s tests, Hyperledger Fabric is a robust blockchain framework to run a variety of financial services workloads.

Read the full article

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