Clearstream, the post trade arm of the Deutsche Börse, is planning to invest in Digital Vault Services (DVS), the centralized platform that digitizes the issuance and safekeeping of guarantees and sureties. The investment is subject to regulatory approvals. While there isn’t an obvious blockchain angle to the investment beyond Clearstream’s D7 using the technology, we’ll speculate how it might be relevant.
A mid term goal of the investment is to integrate the DVS solution with D7, the Clearstream digital securities platform. Hence, it will expand D7 support from digital securities to other digital assets. DVS executives said they envisioned the guarantee platform as providing a service similar to that of a central securities depository (CSD) such as Clearstream.
With the minority investment and its market infrastructure experience, Clearstream believes it can help DVS to scale in Europe.
DVS clients are the corporate issuers, the bank guarantors and the beneficiaries. By centralizing the guarantees, each participant gets a complete view of all the guarantees in which it participates.
It also shares a key feature with the D7 platform. Guarantees can be issued in minutes rather than days, similar to how D7 supports same day securities issuance.
“We are convinced that DVS’s innovative approach to digital bank guarantees, combined with D7’s track record in digitising securities and Clearstream’s central role in global financial markets, will drive significant growth and deliver value for our clients and ultimately the entire financial industry,” said Jens Hachmeister, Head of Issuer Services & New Digital Markets at Clearstream.
To add some context, D7 is blockchain-based platform using smart contracts to automate the workflow in securities issuance and servicing. To date Clearstream has been using a centralized (CeFi) version of the service, with plans for a more decentralized (DeFi) version.
Speculating on a DLT angle
Turning to guarantees, there are multiple potential motivations for Clearstream. The most obvious is the Digital Vault Service is similar to a CSD like Clearstream, so it’s just a different type of asset for which to act as a depository. There’s no particular blockchain angle here.
Another is that letters of credit and guarantees are critical trade finance instruments. Banks have a limited amount of capital to commit to trade finance. In the same way that banks offload mortgages through mortgage backed securities, increasingly banks transfer their trade finance portfolios or bundle them up as asset backed securities (ABS). These are areas involving trading where Deutsche Börse Group could have an interest. Medium to long term, ABS are likely to live on blockchain because of the efficiencies. Recent research indicates substantial financial benefits from using blockchain for ABS.
A third potential outcome is that DLT could significantly expand the use cases for guarantees. One of the often-discussed features of digital currency is the ability to make conditional payments. This is the equivalent of a buyer putting money in escrow until the goods or services are delivered.
Smart contracts and other types of automation will demand these commitments. Without certainty of payment, the automation cycle will break.
If the payment is small and will be in a few days, a buyer will be happy to lock up the cash early as a conditional payment. But if there’s a longer timelapse before releasing the payment or amounts are large, this isn’t a good use of the buyer’s cash. Instead they could get a bank guarantee.
This creates a reinforcing flywheel. The more efficient the process to get a bank guarantee, the lower the cost, the more attractive they become.
Blockchain and guarantees
Meanwhile, there are multiple DLT initiatives around the world related to guarantees. In at least three countries – Australia, Thailand and Italy – banks are collaborating to digitize the process using blockchain. Part of the motivation is efficiency. In Italy’s case, the primary driver is to prevent fraud because combining blockchain and digital signatures ensures the guarantee is legitimate.
