Clearing, settlement, custody and registration services all add a significant cost burden to issuing, trading and holding securities. There are a plethora of specialist agents and counterparties involved in moving securities and cash between investors. Not only are there specific charges for these services, there are also ancillary costs related to dealing with the myriad of different systems that need to be interfaced and integrated with business processes. In total, the global finance industry pays around $65 billion to $80 billion per year in post-trade costs.
How can block chain help
Block chain technology offers a means of significantly reducing the complexity and cost of these post-trade services, enabling participants to operate a shared ledger that is stored on a large number of servers acting as nodes. The authority to execute transactions is conferred by public private key cryptography.
Transactions are added to the database in blocks, and each block is reviewed by the nodes. The block is only added to the database if the node reaches a consensus that the block only contains valid transactions. Apart from setting up and maintaining the nodes, this block chain network should be completely autonomous, and does not require a controlling or regulating entity.
The SETL Solution
A privately funded venture called SETL intends to develop and deploy a specialist block chain that will allow financial market participants to settle securities transactions on a peer-to-peer basis, and to maintain a distributed ‘golden’ ledger of securities and cash balances. In particular, SETL aims to have central bank money available on the block chain. Its block chain will run on an autonomous basis, and will integrate with the current financial markets, payments and exchange infrastructure.
SETL will be able to handle both the security and cash side of each transaction and will also allow for one-sided transfers of securities and cash, either as simple payments or to settle bespoke contracts, corporate actions, dividends and
coupons. SETL will be designed to collapse the costly and
SETL will be designed to collapse the costly and risky clearing and settlement process into a realtime settlement process between counterparties. In addition, by establishing a golden ledger of ownership, SETL will substantially reduce the overhead of securities registration and custody.
The SETL block chain will have the following characteristics:
• Public keys used in the SETL block chain will need to be signed by a certifying authority, making it apparent to users of the block
chain who has certified each key. Certifying authorities will maintain details of the realworld identities of public key users, and
complete anti-money laundering and Know Your Customer checks. SETL anticipates that the certifying authority will disclose that
information when legally required to do so.
• It will have sufficient capacity to process thousands of transactions per second, commensurate with normal volumes in the
• It will be able to handle multiple asset classes, including cash and securities of all types.
• It will allow multi-signature transactions, enabling authorization by a designated subset of users.
• It will allow ‘atomic transactions’ (ie either all transactions occur, or none do), so that transactions will only be processed if all stages have been submitted and properly authorized.
• It will contain specific functionality designed to facilitate the management of liquidity by the participants.
• It will maintain a complete record of transactions and balances historically for the purpose of simplifying regulatory record keeping, transaction reporting and audit.
Balances of cash and other assets currently tend to be maintained on specific systems and can only be deployed for particular purposes: in other words, they are ‘system specific.’ Cash and assets held on a block chain are, in contrast, available to be deployed for any purpose. This will both reduce the amount that banks have to deploy in liquidity reserves, and will simplify their management of liquidity.
SETL expects to be able to provide a solution that will run alongside the existing Bank of England Real Time Gross Settlement (RTGS) system, providing a safe and viable alternative should RTGS be unavailable at any time. SETL will be available at all times, reducing the interbank risk that currently accumulates when RTGS is not running eg overnight and at weekends.
The SETL payment and settlement system will be simple, unified and immediate. If the UK is the first to deploy such a system, it will promote London and sterling as the location and currency of choice for financial services. It is likely that once established in London, the system would be adopted more widely, further consolidating London’s position as the global leader in international finance.