Deutsche Bank explores digital assets
The partners will now explore the development of cross border digital assets and in particular digital bonds with sustainable themes
One of Europe’s leading banks is taking a look at digital assets and whether they are feasible and might make commercial sense.
Deutsche Bank’s Securities Services division will explore a proof of concept for the idea in partnership with Hashstacs Pte Ltd or STACS as it’s otherwise known.
STACS is a fintech development company based in Singapore which aims to transform the financial services sector through the use of technology, with an emphasis on the capital markets.
STACS is looking at use cases such as the lifecycle and management of bonds and intelligent structured products and exchange-traded derivatives, that are linked to ESG or, Environmental, Social, and Governance factors.
STACS Settlity product uses blockchain or distributed ledger technology to create an efficient securities settlement platform, and the fintech also offers applications for use in other areas such as post-trade clearing, identity management, document verification and transaction monitoring.
Deutsche Bank and STACS were awarded a proof of concept grant back in October under Singapore’s Financial Sector Technology and Innovation scheme, FSTI. Which is administered by the island states financial regulator the MAS or Monetary Authority of Singapore.
The partners will now explore the development of cross border digital assets and in particular digital bonds with sustainable themes.
The concept of digital assets is not merely a reference to dematerialised securities held in an online repository or book-entry system. Instead, it refers to the concept of smart or intelligent assets which could potentially have a degree of autonomy and self-assessment.
The concept of smart contracts came about with the introduction of the cryptocurrency Ethereum which was proposed and developed by Vitalik Buterin between 2013 and 2015.
Unlike its predecessor, Bitcoin, Ethereum’s coins were not dumb or static but were instead designed to be programable or smart. The Ethereum code was open-sourced allowing others to use the code as a template from which to develop their own tokens and smart contracts.
Smart contracts are programmed to be aware of factors that determine their execution and could record such, events or take a specific action when these events are confirmed.
By, for example, paying dividend or coupon on an instrument as and when emissions or power consumption targets are met. Or, issuing rewards to a workforce if certain sales figures, customer satisfaction or other targets are met.
The proof of work needed to initiate the actions of the smart contract being provided by the supporting blockchain.
One possible application for smart contracts within the financial markets could be in Credit Default Swaps or CDS contracts. Which act as an insurance policy against corporate defaults and bankruptcy.
CDS contracts are designed to pay out once a so-called credit event occurs.
However, whether such an event has occurred is often a matter of heated debate between counterparties to the trade. As CDSs are swaps, this decision is usually made by specialist committees, such as those at ISDA, the International Swaps and Derivatives Association.
A smart contract could potentially replace the committee with a blockchain derived proof of work.
Deutsche Bank and STACS will look to develop a proof of concept for digital assets linked to sustainability and ESG themes rather than CDS but the concept and role for smart assets in the projects could well be similar.
Speaking about the collaboration with STACS Jeslyn Tan, Global Head of Product Management, Securities Services at Deutsche Bank said that: “As the sponsor of the project, we are proud to partner with STACS on the MAS FSTI funding scheme. Investors will increasingly need to custodize their digital assets, ensure settlement finality, and have confidence in their safekeeping and security with the support of a bank’s institutional infrastructure.”
Benjamin Soh, Managing Director at STACS, said: “We are thrilled to collaborate with Deutsche Bank on this transformative technological project, and further the expansion of our work in green fintech and ESG. We hope that our technology will be the infrastructure rails that empower global markets connectivity and sustainability.
As with all blockchain technologies were are still waiting for the killer use case outside of crypto settlement and origination and this initiative could be a step towards that goal.
