These days, there is a lot of talk in the financial world about putting cash – the fiat kind – on distributed ledgers, but there was also a little action beyond proofs-of-concept. That will probably change soon as IHS Markit, which is a market infrastructure giant, developed a new blockchain-based system to handle the payments leg of syndicated loan trading – and will eventually manage a wide range of financial transactions too. The method of smart contracts and wallets known as Stax is designed to eliminate the last mile of wire transfers where each of the transactions has its own wire.
The plans of IHS Markit
If it happens to be successful, it should cut out the complexity, as well as workload around cash reconciliation between parties in a syndicated loan, which can also involve as many as 30 different banks.
The new world of digital assets can actually be broken down into several different categories. First, there are the natural digital assets which we all know today, like Bitcoin. For financial players wary of the volatility, as well as other risks of cryptocurrencies, there is a more alluring possibility that the central banks are going to decide to issue digital versions of their fiat currencies. But, this may take some time to become a reality.
Meanwhile, a third more practical approach is to use digital wallets to represent, in token form, some fiat money which has been deposited in a traditional trading account.
Indeed, this is what IHS Markit is doing with Stax, which is going to start its testing phase this summer.
The managing director, as well as the head of product management at the London-based company, named John Olesky, explained that IHS bank customers are going to wire money into a traditional account. The deposits are then converted into digital tokens on a private network, and they are ultimately the digital wallets are going to permit for the ongoing settlement of transactions.
Olesky told CoinDesk that they believe they can settle trades 24 hours a day. So, he says that you eliminate those wires and reduce time, as well as effort. He added that they do not think that wire system procedures, technology, as well as uptime should be barriers anymore.
Loans and beyond
Syndicated loans, by themselves, represent a giant, as well as relevant market. The majority of it is settled through IHS Markit’s loan solutions platform that has been created in 2007, making it a little bit older than the invention of blockchains but a spring chicken by legacy financial system standards.
Not like in many other DLT use cases, the purpose of the new Stax system is not necessary to make settlement near-instantaneous but to make it simpler.
As Olesky says, the smart contracts will decide when a trade is ready to close and platform the cash settlement, so the system does not shorten the trade lifecycle. It can last up to 20 days for syndicated loans, which to some extent is deliberate to account for primary issuance, as well as secondary trades, varying interest rates kicking in, etc. Olesky said that it is not always about reducing time; for them, it is about cutting work. He also says that it would be great if they can take something which involves ten steps down to seven.
Syndicated loans are the area of financial trading expertise of Olesky; the previous job he had was heading up IHS Markit’s loan market strategy. But from his perspective as being a technologist, loans just happen to be the first use case for Stax. He said that they have generically built this and that they have already met with exchanges and talked about derivatives, as well as other asset classes.
But, to ultimately work with any kind of payment anywhere, for Stac would involve modifications to the smart contract. For instance, it would have to be tweaked to deal with some other transactions, as well as conditions, and also how the users manage money inside of their wallets concerning how that may be segregated.
In spite of that, Olesky said that the first payment rails of Stax could be applied elsewhere. He said that the rest of the infrastructure is going to work for any payment which is based on the tokenization of fiat. He also mentioned that taking something very natural like the cross-currency swap is just like a list of cash obligations which we must check against a digital wallet.
IHS Markit took a practical approach with Stax. Now, the network is in place, and the company does not require every participant to operate a node; the platform can host nodes for some small movers, as well as less tech-savvy players.
Olesky pointed out that most of the firms don’t have a production blockchain or node operating, so this arrangement is actually going to be a useful way for a lot of them to learn about the technology.
He said that they think this is concentrated enough, as well as specific enough that it can be the first time that they manage this. So, he continued, they are going to learn about interacting with the technology, and they can grow into adjacent items.
Olesky didn’t name the big players who were to take down nodes in the first example of testing, but one logical candidate is JP Morgan, which also recently tested a $150 Yankee certificate of deposit with the use of tokenized cash on Quorum.
In fact, the engineers of Olesky have been building on Quorum and also have some strong ties with the team that is working out of JP Morgan.
Olesky said, beyond the testing stage, that it was early to give an exact time for a production version. He said that they believe the platform is going to be ready earlier than a year from now but they also think that it is going to be about a year for a product launch, which includes testing too.
Further on, there is one more potential use case. Also, some was talking about how large corporates will use digital tokens internally to move funds around in a frictionless manner, in that way removing the need for currency conversions among other things.
Allianz, which is a global insurance firm, revealed that it was experimenting with an internal token system to move cash around, as well as remove currency conversions between subsidiaries in different countries, while the energy giant BP also said that it had been testing internal tokens.
When Olesky was asked whether the Stax blockchain technology could find its way into the payments systems of other large corporate entities. He replied that it is funny to mention that as they have one of the larger banks in the world that inquires about potentially using their infrastructure in order to manage their thousands of internal bank accounts.