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UBS Bank Is Experimenting with ‘Smart-Bonds’ Using the Bitcoin Blockchain

During his talk at IDX Derivatives Expo in London, Alex Batlin, Director in UBS's technology innovation, research and development team shed some light on what the financial institution has been working on in their innovation lab: smart-bonds on the Bitcoin blockchain.

International Financing Review Asia (IFR Asia) reported that the smart-bonds were described by Batlin as bonds where “risk-free interest rates and payment streams were fully automated, creating a self-paying instrument.”

“The key attraction is that there is no middle or back office, and no registry, so clearly a major impact on costs,” said Batlin.

The Innovation Lab

Smart-bonds are one of the first publicly confirmed technologies the Swiss banking giant is said to be exploring since the launch of The innovation Lab in April to explore how blockchain technologies could improve the banking sector. The creation of the lab came after the publishing of an extensive report about the benefits of the blockchain by the international bank.When the report was published, UBS Group CIO Oliver Bussmann told the Wall Street Journal, “I believe – and this is my personal view – that blockchain technology will not only change the way we do payments, but it will change the whole trading and settlement topic.”

Since then, that hypothesis has begun to get some traction as the Nasdaq OMX Group began experimenting with a pilot of blockchain technology as a record-keeping ledger for the Nasdaq Private Market, a small market launched in 2014 to handle the trading of shares belonging to private companies.Smart-bonds likely is just one of several technological applications of blockchains UBS’ lab is exploring. The lab, which is located in the London offices of European fintech startup accelerator Level39, is meant to spur new innovations that can bolster the bank’s long-term growth

.“Blockchain technologies can make banks more efficient – for example, through instantaneous settlement rather than the days it takes at present, lower costs and lower operational risk,” said Batlin during the IDX Derivatives Expo in London. “The simple lesson for banks is that if we don’t do it someone else will.”

Difficulties remain

Bitcoin’s proof-of-work mining algorithm is responsible for the digital currency’s unique characteristics of network security and decentralization, but as Batlin pointed out, it is also causes the system to be slow and expensive. Transactions on the Bitcoin blockchain often take a hour or move and require large amounts of electricity via miners who verify transactions. These hurdles eliminate the possibility of high-frequency or algorithmic trading, as least as it currently stands.

“All kinds of revenue opportunities can emerge,” said Batlin speaking of how these innovations could be monetized, “but it’s still more expensive, so there is a way to go.” 

UBS sign” by twicepixCC BY-SA 2.0 

 

Jeffrey Maxim

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