It might be a while before the Asian Development Bank (ADB) has a working prototype of its proof-of-concept (PoC) for cross-border securities transactions using blockchain, but it is determined to get there.

“As a technical expert, we need to provide a good technical foundation, step by step,” says Satoru Yamadera, advisor for ADB’s economic research and regional cooperation department.

Yamadera says the role of central banks and central securities depositories is figuring out the technical requirements of the network, which includes determining how many transactions need to be made in one day, or one minute. “We are not the ones to harmonize or standardize [those requirements], but at this stage, we think our PoC will give the central banks and CSDs at least the minimum technical foundation so they can move to the next step,” he says.

In late January, the ADB—which assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development—launched a PoC with blockchain providers R3, ConsenSys, and Soramitsu and Japanese IT giant Fujitsu, to find out the extent to which blockchain technology can facilitate cost reduction and efficiencies in multi-currency, cross-border securities transactions.

The project centers on bringing efficiencies to the clearing and settlement process for intra-regional cross-border securities transactions in the Association of Southeast Asian Nations (Asean)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—plus Japan, China, and the Republic of Korea countries (Asean+3).

Although Asean+3 markets operate in similar time zones, cross-border securities transactions are currently processed through a global network of custodians and correspondent banks, which go through global centers in either the US or Europe. As a result, intra-regional transaction settlements within Asean+3 take at least two days due to time differences and varying operating hours of markets within the same time zone.

Yamadera says this is why the ADB embarked on this PoC. “For cross-border transactions, sometimes it’s based in US dollar, or it may go through the Swift network and through the cross-border custodian network. We normally need T+2 for settlement. But if you want to promote intra-regional transactions—say, Japanese investors investing in Singapore—it always takes T+2 because of this network chain,” says Yamadera.

If the PoC is successful and there’s a way to create same-day or immediate settlement through cross-border delivery vs. payment, it may open new opportunities for various transactions. For example, Yamadera says, a Malaysian bank may pledge Malaysian government bonds to the Bank of Thailand or Thai banks. The Bank of Thailand or Thai banks may take the Malaysian government bond to provide liquidity to Malaysian banks operating in Thailand.

But the PoC is still in the early stages, and there are many uncertainties to consider.

This region has its own idiosyncrasies, different regulations, and different restrictions. For example, Japanese yen and Japanese yen-denominated securities can be traded freely outside Japan. However, most other Asian currencies and securities are not allowed to trade offshore. “They need to be settled within their own jurisdiction. That’s an important restriction we need to bear in mind,” Yamadera adds.

For the PoC, the ADB is targeting wholesale bond transactions of large value, though Yamadera adds that there’s no set threshold for these transactions. That said, the common transaction value is typically above $10 million, he says.

The PoC is split into two phases: the designing phase and the prototyping phase, the latter of which is currently being finalized.

Yamadera says ADB has a “good conceptual model,” and will prepare its findings from the PoC in a report that by year-end will be presented and discussed with Asean+3 government officials and members of the Cross-Border Settlement Infrastructure Forum, a working group within the Asian Bond Markets Initiative (ABMI), which comprises central banks and CSDs from across the region.

A collection of nodes

Amit Ghosh, chief information and services officer at R3, says R3’s Corda network will be the platform that connects all these parties on a common, private-permissioned network. A central bank or CSD in each of those countries can connect to the network and then connect to one another bilaterally or regionally.

“That design has happened, we’re almost closing that off. The next phase is building on that design, which is prototyping,” Ghosh says.

As part of that process, he says, the participants are working on the governance aspect of the network. “When you have shared infrastructures or groups of entities working together, you must ensure the rules and how you manage governance are clearly defined. We are advising ADB and the participants on that,” he says.

According to R3, the infrastructure will be a collection of Corda nodes. “Essentially, it’s your endpoint that connects to this shared infrastructure or shared network. Every central bank and CSD in each country will have one node each,” he says.

These central banks and CSDs connect to commercial banks and other entities within their domestic ecosystem. Ghosh says those domestic entities will not have any nodes, but will have accounts with either the CSD or central bank, depending on the architecture and the design of how the system works within each country.

“All of this will be connected on a Corda network, which will be built for ADB, and ADB will also have a node for itself. We also have a concept of notaries, which essentially validate if a transaction is the right transaction. Depending on the design, [the infrastructure] could have either one or a combination of notaries, so think of it as key participants of ABMI hold a node, and anybody domestic that connects to them holding an account on that node, and all these nodes then connect in a network,” Ghosh says.

These notaries could be the central banks or ADB, he adds. “Essentially, somebody neutral who is validating and ensuring what we call in the blockchain world the ‘double-spend problem’ is not happening,” Ghosh says.

The double-spend problem occurs when digital money is spent simultaneously more than once.

Ghosh says the biggest challenge in consortium-type projects is deciding on the ownership and governance structure.

“A governance structure defines who owns this, who runs this, who is the management team, the operating team; where does it sit from a legal and compliance perspective? This is technology IP and it will be in the purview of a legal and compliance framework of at least one of these countries, or many of these countries depending on how you reside the IP and where the data resides. There is a whole body of work you have to think about,” he says.

R3 has seen success in these types of large-scale multi-party projects when the platform is for-profit and led by a commercial entity, Ghosh says.

“From an innovation perspective, we know that such companies who have done this well have often had the consortium members as board members, so think of if you set up an entity for this, then the central banks and CSDs could be board members or owners of that,” he says.

However, he notes that these are regulated market participants, so how they get involved will differ from how purely commercial institutions might approach it, with an equity stake, for example.

“We have seen a lot more success when this is for-profit and led by a management team,” he says. “I think if it’s just purely not-for-profit and there’s no financial incentive for institutions or a group of people to drive this, then we have seen less success.”