DigitalX Announces Plans In Key Cryptocurrency Exchanges

DigitalX Ltd, has announced today that the ASX-listed blockchain software and initial coin offering corporate advisory firm, is dipping its toes into cryptocurrency exchanges.

The Perth-based company has more than $18 million in liquid assets, including $5 million in cash, more than $10 million in bitcoin and about $2 million in ether, power ledger (POWR) and etherparty (FUEL).

The Board of DigitalX has initially approved the use of up to $1 million for the provision of market making services, offering both a buy and a sell price.

The company has begun a risk of cryptocurrency exchanges, with a focus on the Australian marketplace.

DigitalX will also utilise arbitrage trading to take advantage of mispricing across approved exchanges.

Market making will involve providing liquidity to both sides of the cryptocurrency market while maintaining a small open position in the asset being traded.

DigitalX will maintain bid and ask limit orders below and above the spot price. These orders are regularly cancelled and updated as the spot price changes.

The company says this strategy is expected to produce the best results when price volatility is high.

DigitalX says it doesn’t require an Australian Financial Services License to buy and sell the company’s digital currency on digital currency exchanges under the current regime.

“DigitalX has a strong track record dating back to 2014 as one of the leading liquidity providers in the Bitcoin marketplace, supplying wholesale Bitcoin liquidity to exchanges, commercial operators and institutions,” says DigitalX CEO Leigh Travers.

“We wound down our trading desk last year due to a lack of funding. However, our strong financial position, together with the appreciation in the value of Bitcoin, has allowed us to reignite this service.”

The company in June announced a $4.35 million investment from Blockchain Global Limited.

DigitalX decided to take $2 million of the investment in bitcoins rather than Australian Dollars.

At last report, the company held 453 Bitcoins. At today’s price of $US16,838, DigitalX’s holding would be worth $USD7.63 million.

The Blockchain is Reinventing Business

From The Conversation.

Bitcoin may be the most famous example of a blockchain in use, but it is actually a rather unimaginative way to use it.

The blockchain is finally starting to fulfil its promise as a game-changing technology, a kind of infrastructure for record-keeping. To facilitate movement of value (such as money) and changes in ownership (shares, for example), and even to manage online identities.

The Australian Stock Exchange (ASX) has announced that it will use a blockchain-based system to record who owns shares of listed companies, and to keep track of transactions and settlements when people buy and sell shares.

The move comes as the price of Bitcoin has risen more than US$14,000 in the past year. Yet Bitcoin does not really exploit the new databases and record-keeping infrastructure that blockchain technology makes possible.

The blockchain is also called a “public” or “distributed” ledger. Think of a spreadsheet that is publicly available to view, and simultaneously held on numerous computers. When someone transfers a Bitcoin, it is verified by the system, encrypted, and a new line (or “block”) is added to the spreadsheet.

The ASX’s blockchain will replace the ASX’s CHESS (Clearing House Electronic Sub-registry System) system. Currently, the ASX requires each trade to be verified against the ASX’s centralised database of ownership records and reconciled with payments.

So while trades take place in fractions of a second, the actual clearance (making sure who owns what) and settlement (the transfer of money and shares) is cumbersome, slow, expensive, and prone to human error.

The ASX’s blockchain will greatly simplify this process. Instead of having to reconcile trades against a centralised database, the verification of ownership and settling of accounts can be done directly between participants (as is done with Bitcoin trades). This is much simpler, faster and more secure.

A monumental shift

The fact that the ASX’s blockchain announcement made headlines around the world shows what a big leap forward this is.

The ASX’s blockchain will streamline the settlement process, improving productivity and therefore reducing costs in the Australian stock market. This means that our financial markets will work better, offering an immediate benefit to Australia’s economy.

Exchanges are also a global business, and the adoption of blockchain technology in Australia’s major exchange means that it has a competitive edge over other exchanges.

Companies choose where to list, based on a variety of factors including the quality of the exchange technology. More business for the ASX will translate into more local jobs.

One potential downside of the ASX adopting the blockchain, however, is that some workers who currently process settlements on the ASX may lose their jobs. Some financial companies that currently benefit from the slow settlement process, such as brokerage firms, will also lose out.

But the ASX’s move is just scratching the surface of what blockchain technology can do to the Australian financial sector.

The same argument that applies to the ASX – that the blockchain is more efficient and productive than existing record-keeping and transaction processes – can also be extended to other exchanges, such as bond markets.

In other words, the ASX’s blockchain is just the beginning of a technological transformation of Australia’s financial markets.

Blockchains will also make these exchanges more attractive to build services on, such as for managing wealth. This is a further benefit for consumers and the broader finance industry, not purely from lower prices also from the possibility of new products and services.

But how is any of this even possible in the first place? Part of the credit must go to Australian regulators. They created the environment for this huge shift in technological practice.

Australia is now leading the adoption of the blockchain, despite it being a US-built technology. It is similar to how African telecommunications companies are leading the way in mobile payments, even though Finland created modern mobile phones with companies like Nokia.

Even if you’re not excited about new technology in the Australian finance industry, its global competitiveness, or even our regulatory agility, the ASX announcement is a harbinger of what adoption of blockchain technology will increasingly look like.

Author Jason Potts , Professor of Economics, RMIT University

ASX ‘Monopoly’ Tipped to Continue Thanks to Blockchain

From Investor Daily.

According to Morningstar analysts, the ASX’s decision to move its cash equities clearing and settlement system (CHESS) to distributed ledger, or blockchain, technology would further strengthen the exchange’s “strong competitive position”.

“Although DLT has enormous potential, few real-world examples of DLT use have emerged which makes ASX somewhat of a leader in the space, being the first stock exchange to commit to DLT in a meaningful way,” the report said.

The new system would have a number of benefits for stakeholders and stockbroking firms in the form of administrative savings as well as “richer, more timely and more accurate data”.

“ASX currently generates around AUD 100 million or 13 per cent of group revenue from clearing and settlement of cash equities which we expect to benefit from the new system via the monetisation of new functionality and services.”

The adoption of blockchain technology would further cement the ASX’s protection against competition, identified as “regulation and network effects”, the report said.

“The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome.

“A government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses.”

And even if the regulatory barriers were removed, a ‘network effect’ would still provide the ASX protection against competition, the report indicated.

“Competitors can easily create the technology required for a rival exchange, but investors are unlikely to switch to a less liquid market.”

The report pointed to the attempt of the “sole viable alternative exchange to the ASX”, Chi-X, to launch a rival equities exchange in 2011, which only attracted market share of 10 per cent and “appear[ed] to plateau due to a lack of market depth”.

Furthermore, the technical aspect of integrating local market participants such as stockbrokers would then create “switching costs”, which would also dissuade them from moving to another securities exchange.

However, the report also signalled that lack of competition had served to somewhat “undermine” the ASX as it led to “a culture that lacks innovation and efficiency”, and that blockchain could serve to pose a “material threat”.

Nonetheless, the ASX’s willingness to explore the implications of new technologies, capital-light business model, high dividend payout ratios, lack of appetite for acquisitions, debt-free balance sheet and strong cash conversion all meant it had secured a “monopoly in the Australian primary listed equity market”.

ASX Selects Distributed Ledger Technology to Replace CHESS

The ASX has announced its intention to replace CHESS using distributed ledger technology (DLT) developed by its technology partner Digital Asset (DA).

This is an excellent example to highlight that distributed ledger is so much more than just the Bitcoin bubble.

Distributed Ledger technology combines a number of different core elements that support the transfer process and recordkeeping:

  • Peer-to-peer networking and distributed data storage provide multiple copies of a single ledger across participants in the system so that all participants have a shared history of all transactions in the system.
  • Cryptography, in the form of hashes and digital signatures, provides a secure way to initiate a transaction that helps verify ownership and the availability of the asset for transfer.
  • Consensus algorithms provide a process for transactions to be confirmed and added to the single ledger.

CHESS (Clearing House Electronic Subregister System) is the system used by ASX to record shareholdings and manage the clearing and settlement of equity transactions in Australia. It was world-leading when introduced in the 1990s, providing name-on-register functionality, electronic communications and removing paper share certificates. It continues to be a robust and reliable system. ASX is now taking the opportunity to replace CHESS with a next generation post-trade platform using contemporary technology.

Today’s decision follows the successful build of enterprise-grade DLT software for core equity clearing and settlement functions, and the completion of extensive suitability testing by ASX and DA over the past two years. The testing confirms ASX’s confidence in the functional, capacity, security and resilience capabilities of DA’s application of DLT to meet the needs of Australia’s financial marketplace and maintain the highest regulatory and operational standards. The testing included two independent third party security reviews of DA’s technology.

The testing was conducted in parallel with a stakeholder consultation program, which included briefing of regulators, to enable ASX to develop a comprehensive understanding of what the market wants in replacing CHESS.

ASX will now work with stakeholders on finalising the scope of Day 1 functionality for the new system, drawing on its extensive consultation that will continue in 2018. Day 1 functionality and the proposed timing for transition are expected to be released for market feedback at the end of March 2018.

The new system will be operated by ASX on a secure private network where participants are known, ‘permissioned’ to have access, and must comply with ongoing and enforceable obligations.

The system will be designed without access barriers to non-affiliated market operators and clearing and settlement facilities. It will also give ASX’s customers choice as to how they use ASX’s post-trade services. Customers will be able to connect in a similar way they do today, with the addition of using contemporary global ISO 20022 messaging, or they may interact directly with the distributed ledger. The transition period to the new system will be determined in consultation with stakeholders.

Dominic Stevens, ASX Managing Director and CEO, said: “ASX has been carefully examining distributed ledger technology for almost two-and-a-half years, including the last two years with Digital Asset, in order to understand its potential application. Having completed this work, we believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets. While we have a lot more work still to do, today’s announcement is a major milestone on that journey.”

Peter Hiom, ASX Deputy CEO, said: “ASX has consulted extensively on the needs and priorities for replacing CHESS, including with customers, share registries, software vendors, other exchanges and industry associations. I am very grateful for their input and support. We’ve given over 80 DLT system demonstrations to more than 500 attendees, and conducted over 60 CHESS replacement workshops for more than 100 organisations from the global financial services industry.
“ASX has also formed a strong partnership with Digital Asset over the past two years, and we’re confident we have chosen the right partner. Together, we look forward to continuing to work with the industry as we finalise the requirements and the roadmap for implementation of the new system.”

Blythe Masters, Digital Asset CEO, said: “After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential. Together, DA and our client ASX have shown that the technology not only works, but can meet the requirements of mission critical financial infrastructure.”

Coinciding with today’s decision, ASX will exercise its pro-rata right to participate in DA’s recent Series B fundraising and subscribe for US$3.5 million convertible notes. ASX and DA have agreed to work exclusively on DLT in Australia and New Zealand. This agreement applies while the Day 1 functionality of the new system is being finalised, and will continue subject to agreement of the full contractual arrangements for the development and support of the new system. These decisions underscore ASX’s strong commitment to working with DA to unlock the benefits of DLT.

RBNZ Looks At Crypto-currencies

The Reserve Bank in New Zealand has released an excellent Analytical Note on Crypto-currencies “Crypto-currencies – An introduction to not-so-funny moneys“. It is one of the best I have read, so far!

The paper introduces the distributed ledger technology of crypto-currencies. They aim to increase public understanding of these technologies, highlight some of the risks involved in using crypto-currencies, and discuss some of the potential implications of these technologies for consumers, financial systems, monetary policy and financial regulation.

Crypto-currencies have no physical existence, but are best thought of as electronic accounting systems that keep track of people’s transactions and hence remaining purchasing power. Cryptocurrencies are typically decentralised, with no central authority responsible for maintaining the ledger and no central authority responsible for maintaining the code used to implement the ledger system, unlike the ledgers maintained by commercial banks for example. As crypto-currencies are denominated in their own unit of account, they are like foreign currencies relative to traditional fiat currencies, such as dollars and pounds.

They conclude that Crypto-currencies offer some distinct features, such as quicker cross-border transactions, possibly lower transaction fees, pseudo-anonymity, and transaction irreversibility. These features help to explain the growing demand for crypto-currencies, even though they fail to satisfy many of the basic functions of money.

Most crypto-currency accounts lie dormant and many of the active accounts are used only for online gambling or speculative purposes. Perceptions of anonymity have also created a demand for such currencies to facilitate illegal transactions, but the anonymity embodied in crypto-currencies has been over-stated. There have been a significant number of crypto-currency prosecutions in relation to money laundering and other crimes, illustrating that there is no guarantee of anonymity.

While crypto-currencies are growing in popularity, they currently facilitate a very small proportion of transactions. Because crypto-currencies intermediate such a small proportion of transactions, central banks do not presently view crypto-currencies as a material threat.Since crypto-currencies are not well-adapted to the provision of borrowing and lending, we also foresee an enduring role for traditional financial intermediaries.

Crypto-currencies and blockchain technology could well become an important part of global payment systems, but wide-scale adoption will depend on competition from alternative transaction technologies, and on regulation to provide users with security. Crypto-currencies will also need to address technical, scalability issues if they wish to intermediate the volume of transactions undertaken globally.

We conclude that all crypto-currencies are experimental in nature and users face material risks by transacting with them or by holding significant crypto-currency balances. Individual cryptoReserve Bank of New Zealand currencies may be more Betamax than VHS, and more MySpace than Facebook. Even if some of the constructs are enduring, such as distributed ledgers and the use of cryptography, specific crypto-currencies may be supplanted by competing transaction technologies. We close with a Latin expression much-beloved by contract lawyers and economists alike – caveat emptor – buyer beware.

The Analytical Note series encompasses a range of types of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank

Why the RBA would want to create a digital Australian dollar

From The Conversation.

The Reserve Bank of Australia could join the likes of Estonia and Lebanon in creating a cryptocurrency based on the Australian dollar, to reap the benefits of technology like the blockchain but with more stability than other well known currencies like Bitcoin.

The RBA has already been approached by interested startups to create this new digital currency, known as the “DAD” or Digital Australian Dollar.

In contrast with other cryptocurrencies a state-backed digital currency has the advantage of being backed by the government as in fiat currency, but at the same time has the technological advantages shared by other cryptocurrencies.

A digital Australian dollar could remove the role of middlemen and create a cheaper electronic currency system, while at the same time enabling the government to fully regulate the system.

It would also allow transactions to settle faster (several minutes to an hour) than the traditional banking system (several hours to several days), especially in a situation where an international payment is involved.

The difference between a digital Australian dollar and Bitcoin

We already use the Australian dollar in a digital form, for example paying via your smartphone. But banks are essential in this system, moving money on our behalf.

When using a cryptocurrency, you interact with a system like the blockchain, an online ledger that records transactions, directly. Bitcoin, Litecoin, and Ethereum are examples of cryptocurrency that use the blockchain in this way. These currencies are created by the community that use them and are accepted and trusted within the community.

However, since the community runs the system, the price of the cryptocurrency solely depends on the market mechanism. When the demand increases, the price increases, but when the demand decreases, the price also decreases. While it might create an opportunity for speculators to gain profit from trading, it also creates risk for the cryptocurrency holders.

In comparison to cryptocurrency, the Digital Australian Dollar might be well managed that the price volatility could be reduced significantly. The government holds the capability of increasing or decreasing the money supply in the system. This power can be used to stabilise the market supply of the new digital currency.

The blockchain technology also reduces the fee for every payment made. This is made possible by removing the role of banks or other intermediary parties charging fees for their services. However, a small transaction fee still needs to be introduced to protect the system from being flooded by adversaries with insignificant transactions.

The characteristics of cryptocurrency itself might limit its usage to daily transactions. As the pioneer of cryptocurrency, Bitcoin was created to become a payment system, but the users gain incentive by simply saving their cryptocurrency and not using them to purchase goods or services.

They believe the future price of the cryptocurrency is higher than the current price and thus does not make a good medium of exchange nor a store of value. There is no guarantee that the cryptocurrency will hold any value in the future. Since there is nothing to back up the value, users will lose their wealth when the community no longer acknowledges the value of cryptocurrency.

Cryptocurrency might also jeopardise the local government’s effort of implementing regulations to minimise illegal activities. Perpetrators create cryptocurrency transactions easily without being detected by the government’s financial monitoring system.

The privacy features of cryptocurrency also make it hard for law enforcement agencies to determine the actors behind illegal activities. Although most governments in the world have enforced the coin exchange services to identify their users, the operation of the cryptocurrency is beyond their reach.

There are other state-backed digital currencies

The idea of creating a national cryptocurrency is not new. Estonia has explored ways to create Estcoin, following an initiative on the blockchain-based residency registration called e-Residency. Lebanon’s central bank has also started to examine the possibility of creating one.

Despite the efforts of those central banks, several questions must first be addressed before launching the real product to the public. The user’s financial data could be exposed since the blockchain will make all transactions created in the system transparent.

Consumer protection is also a concern since all transactions made in the blockchain are permanent without the possibility of being reversed. Without firm solutions to those problems, the Digital Australian Dollar will not satisfy all requirements to be the next groundbreaking innovation for the country’s financial system.

Author: Dimaz Wijaya, PhD Student, Monash University

Mastercard Opens-Up Access to Blockchain API for Partner Banks and Merchants

Mastercard announced in New York that it will be opening up access to its blockchain technology via its API published on Mastercard Developers.

Mastercard’s blockchain solution provides a new way for consumers, businesses and banks to transact and is key to the company’s strategy to provide payment solutions that meet every need of financial institutions and their end-customers. The Mastercard blockchain API will be part of the Money 20/20 hackathon in Las Vegas next week.

The company has tested and validated its blockchain and will initially implement the technology in the business-to-business (B2B) space to address challenges of speed, transparency and costs in cross-border payments. The Mastercard blockchain technology will complement the company’s existing capabilities including virtual cards, Mastercard Send and Vocalink to support all types of cross-border, B2B payment flows – account-based, blockchain-based and card-based.

There are four key differentiators of the Mastercard blockchain – privacy, flexibility, scalability, and most importantly, the reach of the company’s settlement network.

  • Privacy – Mastercard blockchain provides privacy by ensuring that transaction details are shared only amongst the participants of a transaction while maintaining a fully auditable and valid ledger of transactions.
  • Flexibility – Partners can use the blockchain APIs in conjunction with a wider suite of Mastercard APIs to create a range of powerful, new applications. Software development kits are available in six different languages to make the APIs even easier to integrate.
  • Scalability – Mastercard blockchain is designed for commercial processing speed and extensibility by reaching consensus between a trusted network moderator and network participants.
  • Reach – Mastercard blockchain is integrated into the company’s payment network that includes 22,000 financial institutions to move funds that have been committed on the blockchain.

“By combining Mastercard blockchain technology with our settlement network and associated network rules, we have created a solution that is safe, secure, auditable and easy to scale,” said Ken Moore, executive vice president, Mastercard Labs. “When it comes to payments, we want to provide choice and flexibility to our partners where they are able to seamlessly use both our existing and new payment rails based on the needs and requirements of their customers.”

Mastercard blockchain solution has the ability to power secure and seamless non-card payment transactions such as business-to-business payments and trade finance transactions. It also has the ability to power non- payment solutions such as proof of provenance that helps authenticate products across the supply chain.

With this proprietary solution, Mastercard hopes to create new benefits for its partners and make the commerce ecosystem easier, faster and safer. In addition to building a new solution, the company has also filed for over 35 patents in blockchain and invested in Digital Currency Group, a collaborator that builds, incubates and seeds Bitcoin and blockchain technology-related companies. It recently joined the Enterprise Ethereum Alliance to explore the possibilities of the Ethereum technology across a wide range of potential use cases, many of them well outside the scope of Mastercard’s traditional payments environment. In addition, Mastercard is also working on new use cases with startups that are a part of its Start Path Global program.

NAB trialling IBM blockchain technology

From Investor Daily.

National Australia Bank is one of a number of global banks that are trialling a cross-border payments solution powered by IBM Blockchain.

IBM has rolled out a new blockchain banking solution designed to reduce settlement times for cross-border payments.

NAB is the only Australian bank involved in the trial so far, along with institutions from Argentina, Indonesia, Thailand and the Philippines, among others.

According to a statement by IBM, the solution uses a blockchain distributed ledger to allow all parties to have access and insight into clearing and settlement of payments.

“It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets,” said the statement.

The IBM solution, which has been created in collaboration with open source blockchain network and KlickEx Group, is already processing live transactions in 12 currency “corridors” across the Pacific islands and Australia, said IBM.

“For example, in the future, the new IBM network could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia.

“The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit, and finalise transaction terms with immediate payment, conducting global trade with transparency and relative ease.”

The solutions is run from IBM’s open source Blockchain Platform on Hyperledger Fabric.

Mortgage fintech looks to blockchain for home loans

From The Adviser.

The CEO and founder of an online mortgage platform has revealed that the fintech is looking into how it can utilise blockchain to make the home loan contract process more efficient.

Speaking at the Informa Credit Law Conference, Mandeep Sodhi, the CEO of HashChing, revealed that the platform was looking into the distributed ledger technology for mortgages.

When asked by The Adviser what HashChing was using blockchain for, Mr Sodhi said: “We have been exploring blockchain in the home loan contract, smart contract space and securitisation as well.

“It’s more in the future road map but mostly around how quickly can we exchange a contract, through smart contracts. But also, if you decide to come on with a loan product at a later stage (of course, we’ll distribute it through brokers only), but then, how quickly can you settle that loan as well and securitisation? That’s where blockchain plays a really important role, if you need a securitised [loans] done quickly.”

He concluded: “Start-ups are tapping into AI technology, through Amazon Alexa, Google. It’s where banks are lagging, but start-ups are moving fast. That’s what banks need to think about.”

Bank couldn’t beat broker rate

Looking back at the journey of HashChing, Mr Sodhi stated that the idea first came about in 2014, after he found that a major bank, at which he worked, could not match or beat a broker-secured home loan rate.

Speaking at the Informa Credit Law Conference, Mr Sodhi said that he had gotten his mortgage through the bank at a discounted employee rate, but later found that one of his friends had gotten a lower rate for his mortgage at the same bank.

He said: “I was a loyal banker looking for my first home loan and I reached out and said: ‘Hey, can I get my staff discount?’ And my bank said that they could give me the special staff discount rate.

“I told my friend, Atul Narang (the co-founder of HashChing), about securing this great rate on my home loan and asked him: ‘Why don’t you become a banking man?’ And he said: ‘Well, actually, I’ve secured a better rate than you, also at your bank.’ And that left a bad taste in my mouth. So, I took his letter to the bank and asked how he got a better rate and asked them to match it, or at least beat it, because it’s really embarrassing. And they said: ‘We can’t do that.’ When I asked why, they said it was because he had used a mortgage broker.

“Now, I didn’t think that mattered… I worked for the bank. But they said: ‘We can’t match mortgage brokers’ rates.’”

It was after this “frustrating experience” that Mr Sodhi said he tried to find the same rate on comparison sites and then through a broker, but still couldn’t (he reportedly didn’t use Mr Atul’s broker due to geographical barriers).

Mr Sodhi continued: “There are thousands of people searching for good home loan rates every day on home loan comparison sites, who are clueless, just like I was. And that’s when we decided to start HashChing — where the journey starts with a negotiated rate that the broker secures from the lender.”

He went on to tell delegates that the majority of fintech start-ups come to market because of “frustrations with the banking system”.

“They’ve seen this opportunity, tried to change it in banking, but have been shut down — and that happened to me as well, so we decided to take it on ourselves.”

Mr Sodhi said that the HashChing platform, which launched in 2015, now has 679 brokers on the platform helping 23,959 borrowers apply for more than $12 billion of loans through more than 60 lenders.

Is a Central bank-issued digital currency a realistic prospect?

Interesting speech from Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbankentitled “From Bitcoin to digital central bank money – still a long way to go“.

He says the Bundesbank actively shapes the ongoing conversation about distributed ledger technology (DLT) by contributing insights of its own, not least because as a central bank, trust is its most precious asset. The stability and efficiency of systems alone is their primary concern.

They wish to neither hype up a “hot topic” nor hinder the development of highly promising innovations.  But, healthy scepticism, coupled with curiosity and critical analysis, is warranted when it comes to both DLT and central bank-issued digital currency. He concludes that a Central bank-issued digital currency, is currently an unrealistic prospect.

“The road to a digital central bank – assuming there would be any benefits in the first place – would be a very lengthy one. At present, there is not even a recognised basic blockchain. Major consortiums are developing different types of basic blockchains, each with their own particular features. Not all of them can be used in the financial sector”.

The original promise of Bitcoin was to forge a “trustless” payment system – that is, one that required no trust. I quote from Satoshi Nakamoto’s paper from 2008 (Bitcoin: A Peer-to-Peer Electronic Cash System): “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

I feel that too little attention is being paid to Nakamoto’s primary goal of constructing a groundbreaking, trustless electronic payment system which, like cash, would facilitate peer-to-peer (P2P) transactions. At the same time, Nakamoto was looking to create a currency which was not based on trust. This aspect – forging a new currency that does away with central banks – has become a major talking point in the current debate. I have come here today to explain why a trustless currency is not feasible, and I will also argue that the merits of blockchain can be harnessed more readily with trustworthy institutions than without.

To get a grasp of Bitcoin, we need to put our minds to the essence of money. There are two types of money. Money as a commodity, and money as a claim.

Money as a commodity, that could be a commonly used consumer good which is mostly non-perishable. Cigarettes, for instance, were used as a money substitute in Germany after the Second World War.

But equally, money could be a durable good – gold being the most prominent example of this. Gold is extraordinarily durable, and it has an intrinsic value as a sought after industrial metal, say, or as jewellery. Indeed, for centuries, delivering gold was regarded as the ultimate form of settling a claim.

Consumer and durable goods which can be used as money substitutes both have an intrinsic, consumption or utility value.

Virtual currencies, meanwhile, which are transferred much like goods, are a fabrication. That is not to consign them straight to the category of “fraud”. Yet they have no intrinsic value, just an exchange value. You can’t consume or use them, only exchange them.

On the other hand, there is money as a claim. The bulk of our money – central bank money and commercial bank money – is a claim on either the central bank or a commercial bank.

Every euro in cash and every euro in credit balances in TARGET2 represents a liability for the Eurosystem. And the euro is backed by the Eurosystem with its constituent central banks, one of which is the Bundesbank.

Unlike consumer or durable goods, central bank money does not have any consumption or utility value. And the issuing central bank’s credit quality and integrity is reflected in the value of its currency. The value of a currency, then, hinges on trust in the central bank.

Not just that: the issuer – so in the euro’s case, the Eurosystem – takes collateral from its monetary policy counterparties as a “deposit” for providing euro currency. That indirectly anchors the euro in the real economy.

Virtual currencies, by contrast, have no issuer, no footing in the real economy. No one has to redeem them. They are a fabrication and propagate according to a fictitious set-up in virtual systems which, in some cases, can be altered or newly created at the whim of a small group of participants. What is more, their governance regime is opaque, if not to say obscure – not to mention the fact that the identity of the participant or participants – no one knows for sure how many there are – behind the pseudonym Satoshi Nakamoto remains shrouded in mystery.

Virtual currencies are exchanged in the same way as goods, but they have no intrinsic value of their own. That is undoubtedly one reason why their value is highly volatile. Over the long term, that naturally also exposes Bitcoin holders to the risk of total loss. For us, Bitcoin is not money, it is a speculative plaything. The great number of sometimes dubious initial coin offerings is a clear indication that Bitcoin is more of a funding instrument.

To repeat: it is more of a speculative plaything than a form of payment. Hence my repeated warnings against investing in virtual currencies. We are witnessing a remarkable increase in the value of some virtual currencies. But that does not alter the risk of total loss.

2 Blockchain/DLT in the world of payments

For us, Bitcoin’s most important contribution is the underlying blockchain technology, or to put it more broadly, distributed ledger technology (DLT). This technology could help boost efficiency in payment and settlement processes.

That is why we have been looking at this technology from three different perspectives. First, the Bundesbank develops and runs major payment and settlement systems, often in conjunction with other central banks, and in this context we explore innovative technical capabilities which can contribute to their stability and efficiency.

Second, the Bundesbank acts as a catalyst to forge improvements in payment operations and settlement structures. The better the Bundesbank grasps the practical implications of technologies or processes, the more forcefully it will be able to present its arguments, which always aim to preserve the stability and enhance the efficiency of payment and settlement systems.

Third, the Bundesbank monitors the stability of systems and tools used in the field of payments and settlement. Being able to gauge the relative merits of state-of-the-art technology is a key skill in this regard. That is why the Bundesbank – much like other central banks worldwide – has been putting a great deal of thought into DLT, even though this technology is still very much in its infancy.

Potentially, distributed data storage means that DLT can simplify reconciliation processes associated with complex work-sharing value added chains. DLT is seen as having disruptive potential since it generally allows transactions to be carried out directly – that is, without intermediaries.

Developed originally for the virtual currency Bitcoin, DLT will nonetheless require extensive modifications if it is to be adapted to the needs of the financial sector. For one thing, the legal framework as it stands requires participants to be identifiable, transactions to be kept secret from third parties, and transactions to be settled with finality.

For another, transaction throughput needs to be high. That said, some of the consensus mechanisms, as they are known, absorb so much time and energy that efficient settlement seems barely possible. Furthermore, they require substantial additional data transfers, which adds to the costs.

For comparison purposes, the Bitcoin network, at its peak, settles roughly 350,000 transactions worldwide every day, and given its current configuration, appears to be running at almost full capacity. The German payment system alone, meanwhile, processes more than 75 million transactions on average every business day, according to the data for 2016.

The traditional answer to the problem of mounting complexity in the interactions of a multitude of independent participants has been to use a central bank – an institution which centralises the settlement of payment transactions. Hence the name: Central. Bank. This arrangement channels the many different bilateral payment flows and order books into larger flows which are then routed via or by the central bank and posted in a central bank account. That was a huge step towards greater stability and efficiency in the world of payments.

As a matter of fact, that is why we are seeing a trend towards centralisation and hierarchical structures in the development of basic blockchains as well. There are multiple reasons why a pure P2P settlement arrangement does not appear viable.

A pure P2P world appears unfeasible without trusted institutions. I call this factor the lack of a real reference framework. Bitcoins, you see, are merely virtual, and they change hands between virtual participants. They never leave the Bitcoin blockchain, and they will never have a real point of reference until they are exchanged for real currency, which takes place outside the blockchain.

Once real transactions come into play, a real point of reference is needed. You can trade a house on the blockchain in the form of a virtual token. But on the blockchain, that tells you nothing about whether the house even exists, whether it has the features it is said to possess, and whether it belongs to the seller in the first place. To verify all those things, there needs to be a trustworthy outside third party.

The basic matter of a participant’s personal identity needs to be verifiable outside the blockchain. Only then can we conduct real transactions with that participant.

That is why I feel that the purported goal of settling transactions without trustworthy third parties is a pie in the sky proposition.

All in all, we are highly sceptical about the extent to which DLT can be put to use in the financial sector. Given the current state of the art, it is somewhat unlikely that DLT will become a widely used application in individual and retail payments.

In the field of securities settlement, though, the shrinking processing times and reconciliation costs might prove to be a more important factor and suggest that DLT does have its uses.

The Deutsche Bundesbank is analysing the pros and cons of DLT in a project it is running with Deutsche Börse. While this project indicates that DLT does indeed have its functional merits, it is still unclear how far DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed.

3 Central bank-issued digital currency

When using DLT, the question might arise in future as to whether central bank-issued digital currency could be provided for the safe settlement of larger transactions.

Central bank-issued digital currency would rank alongside cash and credit balances with the central bank as another form of central bank money, and it would also need to be posted as a liability on the central bank’s balance sheet.

There are several technical options in terms of the form this would take. Transfers could be value-based (like cash) or account-based (like deposits), anonymous or registered, its use could be restricted – in terms of amount or payment purpose, say – and it could be remunerated or, like cash, earn no interest.

The specific design dictates not just how far the supposed benefits of DLT-based central bank-issued digital currency will come into play, but also the macroeconomic repercussions, which also need to be factored into any overall verdict on its merits.

Arguably, the most important question here concerns who exactly should be allowed to use central bank-issued digital currency, or, to be more specific, whether central bank-issued digital currency should be issued to non-banks as well. Because if that were the case, we would probably see substitution effects between the different forms of money. Confining its use to the settlement of transactions among banks, on the other hand, would not involve any substantial changes over the status quo.

In particular, non-banks could convert their sight deposits at banks into central bank-issued digital currency if storage as an entry on the distributed ledger appears more secure and more convenient than hoarding it as cash.

Significant parts of non-banks’ sight deposits being shifted into a blockchain, however, and no longer being available­ to the credit institutions as virtually unremunerated funding ­might have considerable repercussions for the interest margin, the scale of lending ­as well as the business models in the banking system and the banking system’s structure.

Moreover, simply expanding the monetary base accompanied by sight deposits being shifted into central bank-issued digital currency would require a larger amount of collateral and would thus have a significant impact on the structure and risk profile of the central banks’ balance sheets.

There is a wide variety of potential monetary policy and stability policy implications. And these are currently being investigated by a number of central banks. As things stand, the likely consequences remain to be seen.

In a nutshell, the title of my speech today: “From Bitcoin to digital central bank money – still a long way to go” sums up the status quo of our considerations.

The road to a digital central bank – assuming there would be any benefits in the first place – would be a very lengthy one. At present, there is not even a recognised basic blockchain. Major consortiums are developing different types of basic blockchains, each with their own particular features. Not all of them can be used in the financial sector.

At the same time, applications for payment and settlement systems are being developed on these shifting sands. There is a lot going on in this field. Technology has been advancing at a pace unseen in the past decades.