This will involve exploring how certificates of deposits and wholesale term deposits can be tokenised, which means they are turned into a digital asset and stored on a distributed ledger, to create cost savings for post-trade processes including settlement and custody. Imperium expects banks may be able to save between 30 per cent and 50 per cent of costs by eliminating settlement risk and automating custody, compared with the current processes involving settling through the ASX’s Austraclear service.
The RBA has estimated annual cost savings from tokenised assets could be between $1 billion to $4 billion for banks and investors.
“The banks are under enormous pressure to get costs out and these are huge markets,” said Imperium chairman Rod Lewis. “We know the technology works because we are already doing it. This pilot will allow the banks and their [investors] to collaborate to see what the real benefits of using this infrastructure will be.”
Former National Australia Bank chairman and Treasury secretary Ken Henry joined the DFCRC board in November.
Imperium Markets CEO Stu Burns with chairman Rod Lewis. “Clearing and settlement regulation has to be changed to fit into a digital future,” Lewis says. Rhett Wyman
Banks are interested in improving current manual processes for debt raising, including dealing via phone calls, emails, manual ticketing and spreadsheets. Trade reconciliation can take hours, or even days in bond markets.
“These frictions exist in the processes now, and what we are promising is using DLT to put the transaction and settlement together, so there is no clearing and the registry is self-custodial,” Mr Lewis said.
The tests aim to identify the changes to regulation that would be required to support markets that do not require central securities depositories and clearing houses.
RBA assistant governor Brad Jones told the Financial Review Crypto Summit in October that tokenisation offered “intriguing possibilities”, pointing to up to $4 billion of annual cost savings for banks and market players and $13 billion for corporations by reducing issuance costs. These were “sufficiently large [to be] worthy of further investigation,” he said.
The federal government wants Australia to keep pace with financial market innovation, as global investment banks continue to test blockchain systems. For example, UBS has already tokenised money market funds, while JPMorgan is exploring trading of US Treasuries and residential mortgage-backed securities. Citi reckons there will be $US4 trillion ($6 trillion) to $US5 trillion of tokenised digital securities trading in marketplaces by 2030.
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