World Bank: Blockchain Could Reduce Settlement Time to Seconds

Blockchain technology could cut trade settlement time from days to seconds, a World Bank officer says.

“I think practical transactions allow you to see that the potential benefits [of blockchain], such as the reduction in settlement time,” says Paul Snaith, the multilateral lender’s head of operations for capital markets, speaking to WatersTechnology ahead of the one-year anniversary of the bank’s issuance of the first blockchain bond, Bond-i. 

“You could have near simultaneous settlements if you have tokens of appropriate value. That would change some of the mechanics of how liquidity is positioned for a transaction and—this is one of the things we said about Bond-i—instead of a settlement times being T+X measured in days, it could be T+X measured in seconds,” he says. 

The World Bank partnered with the Commonwealth Bank of Australia (CBA) to build a platform on the Ethereum blockchain, and issued Bond-i in August 2018. The partners announced in May that they had successfully enabled secondary market trading of the bond, making this the first bond whose issuance and trading are recorded using distributed ledger technologies. 

Snaith says the technology behind Bond-i clearly enables individual participants to directly trade securely, and that the potential for costs savings and efficiency is huge. Settlement, which usually takes two days, could be finalized much more quickly in the future, reducing settlement risk.  

“It [blockchain] is worth exploring because it could potentially drive down risk, it could drive down cost, and it could increase speed. I think it is easier now to conceive of trading and settlement mechanisms that have an overlay of information systems illustrating pricing information, liquidity, all of those things, and are likely to be available with much more simple and rapid exchange behind it,” he says. “That is the future.”

Snaith says that although the current market infrastructure works very well, there is potential for cutting costs in the long run—though he also cautions that market infrastructure is very complex, and wholesale change will not happen in the short term. “If things like capital formation can be done more cheaply, we think that could have a significant development impact, and we are really interested in that. There are so many different dimensions of it,” he says.

Legal Challenge

Bond-i faced some legal considerations during its development, Snaith says, often related to the fact that current regulations that are designed to protect investors reflect the technological structure of markets as they are today.

For example, he says, “The creation of an asset or bond on a blockchain is the straightforward part, but it implies that investors are able to hold these assets directly and, potentially, trade them directly. But if that were to occur, then the platform itself would become an exchange with regulatory and licensing implications under current law,” Snaith says.

With Bond-i, only the security registration is on the blockchain. The parties considered using digital tokens for settlement, but decided against it because of regulatory constraints and tax complexity. Bond-i issuances are settled using Swift’s payment network. CBA acts as the issuing, paying and calculating agent.

The platform was built on a private version of the Ethereum blockchain. It was independently validated by a blockchain engineering team from Microsoft to ensure it was fit for purpose. The validation was then presented to investors to make sure they were comfortable with it. The World Bank runs two nodes on Microsoft’s Azure Cloud, while CBA runs on the Google Cloud. There is also potential for regulators to run a node in the future, allowing them to have a real-time view of the transactions on the ledger.

CBA was the sole arranger for the bond and developed the platform, with the World Bank conducting technical observations of the development. Snaith says the World Bank does not plan to become a technology company, and will remain focused on its core business of funding economic development.

But the bank will consider other partnerships on blockchain projects, he says. “If we find a [blockchain] project with other partners that has a real learning benefit, we will consider it. Because we are a frequent issuer and because we make payments around the globe, we are in a position to do this. We come to market quite regularly, we are well known in the capital markets, and we have a serious purpose.”

In such projects, most of the development will be done by others, with the World Bank being the issuer and engaging on understanding and sharing any technological benefits it derives.

In April, the World Bank also launched a quasi-cryptocurrency called “Learning Coin” with the International Monetary Fund for internal usage. The currency doesn’t have monetary value and is intended to deepen understanding of blockchain technology.

However, Snaith says the World Bank will not be issuing its own cryptocurrency.

“I do not anticipate the World Bank issuing a currency at all,” he says. “It is doing some token experiments to deepen understanding, and that is valuable. I cannot imagine that as being a function of the World Bank. Our commitment is to reducing poverty, increasing shared prosperity, and promoting sustainable development. Understanding a rapidly changing world, whether in capital markets, payments or secure title to property is a very good thing.”