The Value of Blockchain for Fixed-Income Markets

Blockchain technology has transformational implications for fixed-income markets. Why? As a decentralized network, blockchain technology is uniquely capable of managing the full lifecycle of financial agreements on a shared set of books and records while maintaining privacy. 

A fixed-income single source of truth

For many of the financial executives we talk to, they often narrowly equate blockchain technology with “tokenization,” or-the creation of digital claims to real world assets.  But in reality, blockchain technology can do much more to solve problems in fixed-income markets than the simple tokenization use case. The blockchain can serve as the single source of truth for the global fixed-income market. Multi-party  financial agreements such as bonds can be managed in totality on a decentralized network. 

This is possible because blockchain technology is an operating system that allows large institutions to securely share information or transfer value on a peer-to-peer basis. The blockchain serves as the single source of truth for the state of agreements. Every issuance, interest payment and trade is signed and recorded to the same shared data repository. The blockchain maintains a perfect, tamper-proof audit trail of every agreement and every input into those agreements, providing definitive evidence that all parties fulfilled their obligations throughout the life of the agreement.  

Expressed in the vernacular of capital markets, blockchain technology will bring real-time delivery versus payment, automated and frictionless interest payments, improved liquidity, streamlined regulatory reporting, and more efficient use of capital. Ultimately, the fixed-income industry will benefit from  dramatically reduced counterparty risk, billions in operational savings and a much more robust and secure infrastructure for future institutional capital markets.  

Billions of savings in reconciliation costs  

In a blockchain network, the blockchain protocol itself does the reconciliation. All actions on the network including the issuance and trading of bonds, payments of interest and delivery of bonds versus payment after a trade are written to the blockchain and shared with other institutions through an algorithmic reconciliation process called consensus. This algorithmic reconciliation is a powerful cost-saver, eliminating the need for institutions to spend billions each year on costly manual reconciliation processes between parties. Instead of each institution maintaining their own centralized ledger,everyone can use a synchronized distributed ledger to access information about the state of financial agreements. Anyone with proper cryptographic credentials can see in near real-time when payments are made and assets have been transferred.

Even capital markets powered by blockchain technology will experience occasional problems caused by human error. However, since every transaction on the network is signed, recorded, and shared in real time, these errors can be identified and addressed very rapidly. The record of events is definitive on a blockchain so resolving discrepancies is far more straightforward than current trade error investigative and dispute resolution processes. 

How blockchain technology ensures real-time delivery

When we say a bond is “issued” on a blockchain we mean that the blockchain serves as the bond’s sole registry of ownership. The blockchain also maintains records demonstrating that all of the obligations between issuers and investors have been met. Traditionally registries for securities have been maintained by trusted intermediaries, however, in a properly implemented blockchain network, the registry is maintained by the participants that comprise the network.  The rules that govern the network are expressed in both controlling legal documentation and shared application code called smart contracts which are stored on the network. Smart contracts are the application code that ensures payments are made on time, trades are affected appropriately, and any rights and restrictions associated with the security are enforced. 

With a blockchain network, financial institutions don’t have to rely on a trusted third party to update registries following trades. Instead, the process is fully automated. Immediately as the seller receives payment, the ownership of the bond is automatically updated. Following a trade the bond can be frozen in a kind of digital escrow while the network awaits notification of payment. When payment notification is published to the blockchain, the bond is released from escrow and the registry of ownership is updated. In the future we expect to integrate with real-time payment systems powered by blockchain technology to allow for immediate settlement following trades. 

Building an Institutional Trust Network for fixed-income

At Symbiont, we are building a new operating system for institutional finance. This operating system provides the trust that could only be provided by intermediaries in the past. Now independent, mutually distrusting organizations can securely conduct business on a peer-to-peer basis while maintaining the same privacy guarantees. 

Leveraging this new institutional trust network, complex multi-party financial agreements like bonds can be managed throughout their life by software deployed on a decentralized network rather than a trusted central authority. Payments can be automated, trades can be settled, and records can be maintained without the need for a referee in the middle to reconcile and update records. 

This new paradigm will radically simplify the infrastructure of fixed-income markets. By removing friction and costs, blockchain technology will make existing markets more efficient while opening the door to new and innovative business models that will continue to advance fixed-income markets.