Ethereum Labs


Settlement & Clearing

on the blockchain


apital markets are desperately in need of modernized technology for the clearing and settlement of dematerialized securities. Blockchain technology offers a solution, but the complexity of marrying the technical solution with the complex regulatory framework is significant. Let us look at the issues in brief.

Bitcoin and its blockchain has been proposed, but there are clear reasons why it will not be suited to this environment.

  • Bitcoin consensus is subject to attack by unregulated parties
  • Bitcoin’s Proof of Work is wastefully expensive in terms of electricity
  • Bitcoin’s blockchain was not designed to deal with vastly different classes of dematerialized securities

More reasons can be cited, but the industry is fairly united in its agreement that Bitcoin is interesting, but not ideal for this application. Trying to fit a round peg into a square hole has never worked.

At Ethereum Labs we are convinced, as are many in the industry, of the superiority of the Ethereum solution.

Considering the nature of the securities that are subject to clearance and settlement, we see there are bonds, equities, dividends, insurance premiums, insurance claims, coupons, company actions, collateral, liens. Some are heterogenous, requiring further sub-classification, such as the different types of bonds. The way they behave, and the rules applicable to each is a further layer of complexity.

Storing data on the blockchain is therefore simply a matter of tokenization (as suggested with colored coins). A greater degree of specialization per security class will be required. To enhance functionality there will likely be many solutions offered in the form of Distributed Applications (DApps), and this leads us again to the dominant position Ethereum enjoys in this space.

On Ethereum we can build multiple blockchains, with associated smart contracts and DAPss, that communicate across the blockchains, using the languages and tools provided within Ethereum. Each blockchain can be customized to requirements, and each token (dematerialized asset) can be designed to be fit the specific security.

Unlike the technology that drives the securities markets, there are cohesive and efficient entities that fill specific roles. These include:

Central Securities Depositories

These are entities that provide a central point for depositing securities. The main CSDs are the Depositary Trust & Clearing Company (DTCC), Euroclear and Clearstream.

Central Clearing Counterparties

These are entities that act between the trading layer and the settlement layer. They act as buyer to every seller, and seller to every buyer. They are key to managing counterparty risk.

These entities, and the extensive harmonized regulatory frameworks that have been built up around them – national and international – need not, and will not, be dismantled by blockchain technology. For this reason it is likely that permissioned blockchains, where these entities are the drivers, will be the mechanism by which the technology is applied in settlement and clearance.

At Ethereum Labs we believe the solution lies in the Turing Complete blockchain that is the Ethereum platform. We envisage a permissioned blockchain ecosystem where the validators are fully authenticated and regulated, and where there is harmony with the regulatory framework that exists in the market today. We see efficiencies in specific areas such as payment and delivery driving the adoption of the technology.