On December 3, Bursa Malaysia announced it’s completed a proof of concept in its offshore center, Labuan, to issue a bond, with technology provided by Singapore-based Hashtacs, a.k.a. STACS.
This is a big deal on its own merits: the national stock exchange of Malaysia is paving the way for bond issues in tokenized form with three onshore investment banks-slash-sponsors: Maybank, CIMB and the local arm of China Construction Bank.
This is still at the experimental level, though – whether the exchange actually goes ahead with live issuances has yet to be determined.
The exchange’s focus is likely to include green, ESG-compliant bonds, and sukuk (Islamic structured fixed-income products), according to Benjamin Soh, founder of STACS and its managing director. (Bursa Malaysia executives declined to comment for this story.)
One of Asia’s national exchanges is therefore paving the way to create digitized versions of securities using blockchain and smart contracts to create a more efficient version of capital markets.
Across capital markets
This is only part of the story, however. STACS is also working with asset managers and private banks to create use cases for tokenization. And while these are today still discrete projects, they are taking place on the shared operational infrastructure of STACS’s blockchain.
Which means at some point these projects could interoperate.
Soh, who is based in Singapore and has been a backer of other blockchain-based initiatives including Gibraltar Digital Exchange, says the long-term goal is to digitize all processes in capital markets.
Right now this is taking three forms.
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First is reconciliation, starting with the buy side. Eastspring Investments, a $220 billion asset manager owned by insurer Prudential, has begun testing with STACS to reconcile trades, says Soh. (Eastspring executives declined to comment.)
Anything blockchain requires the entire industry to join the network in order to benefit from the ability to cut out the back-and-forth paperwork involved in matching individual records. But Eastspring has begun to trial STACS in parallel to its status-quo systems. Its portfolio manager or traders can input transactions through its order management system to STACS’s proprietary blockchain. This ledger can match all the results and inform Eastspring and its counterparts through traditional pipes.
“It’s a parallel system but it connects faster,” Soh said.
Digital technology is not just a better replacement for status-quo processes, however. Blockchain enables the use of smart contracts. For now, at this rudimentary level, these may not add value. But by processing trades on STACS, Eastspring is setting itself up to be able to deal in digital assets and programmable tokens.
Meanwhile, STACS is also working with the Hong Kong arm of EFG Bank to help it produce structured products. Structured products originate with an investment bank and are distributed through a private bank to an investor. Putting these on a blockchain again opens the possibility of building these products via smart contracts.
Structured products are typically built to provide investors with a particular outcome (a return) that depends on underlying security or index movements, perhaps combined with other conditions. These may be complex, but a smart contract can automate all the potential results, so the final outcome is delivered without back-office processing.
“This shows how banks are going deeper into tokenization,” Soh said.
Connecting the dots
And now there’s the Bursa Malaysia pilot with three banks. The exchange is mirroring bond issuances in a distributed-ledger environment, with securities converted to tokens and interacting via smart contracts. It will compare performance in the real world with its simulation.
For Soh at STACS the vision is to marry these various projects into an industry platform, assuming the institutions decide to move from pilots to production.
The firm is also making access to its smart contracts available to banks via APIs, for institutions that want to experiment without committing to full projects on blockchain. The idea is like a store of smart contracts for banks that don’t want to make big investments but want to develop products with counterparties.
Although the efficiencies of blockchain-based finance are attractive – getting rid of many middle- and back-office costs – there remain impediments to widespread adoption.
Soh says the long-term driver to get banks to accept blockchain-based infrastructure for capital markets will come down to saving the capital they must now post to clearing houses for ensuring trade settlement.If the risks around settlement are eliminated, then that money can go to lending, investments, or proprietary trading and facilitation. According to the Bank of International Settlements, there’s up to $800 billion of bank capital that could be freed if it wasn’t backing clearing arrangements.