Don’t Tell Anyone, but Private Blockchains Handle Over $1.5T of Securities Financing a Month

As a researcher with a background in finance and blockchain technology, I find it fascinating how the traditional financial industry is increasingly adopting private blockchains for executing large-scale securities financing transactions, specifically repurchase agreements (repos). According to recent reports, these private blockchain platforms are handling trillions of dollars in repo volume monthly, with significant savings potential for banks.

Enthusiasts of tokenization in the crypto and conventional finance sectors may find it noteworthy that more than $1.5 trillion in value of repurchase agreements and various securities financing instruments are processed each month through privately operated blockchains.

As a researcher studying the blockchain market, I’ve discovered that while it’s a vast and fragmented landscape valued in the trillions of dollars, the implementation of private blockchains is gaining significant traction among major global banks and institutions. In fact, the usage of these loops outweighs the often-publicized tokenization of real-world assets on open chains like Ethereum.

It’s worth noting that these hidden ledgers utilizing permission-based transactions are likely among the most effective uses of blockchain technology today. The reason being, repo markets – where securities serve as collateral for cash loans with a predetermined repurchase date and price – play a crucial role in financing activities within capital markets.

Wall Street giants such as JPMorgan and Goldman Sachs are hesitant to disclose detailed information regarding activities like repo trading. Reportedly, JPMorgan handles approximately $2 billion in transactions daily through its Onyx blockchain platform. This innovative technology empowers clients to execute billions of dollars’ worth of repo transactions swiftly, using smart contracts for the instant tokenization and transfer of cash and collateral on a unified digital ledger, according to Nikhil Sharma, Head of Growth at Onyx Digital Assets.

As a crypto investor, I’m keeping a closer eye on the significant transactions worth hundreds of billions that systemically important banks are carrying out daily on Broadridge’s Distributed Ledger Repo (DLR) platform. This platform manages an impressive $50 billion in repo volume and boasts reputable clients such as Societe Generale, UBS, HSBC, and DRW. Another notable player in this space is HQLAx, a European powerhouse specializing in high-quality liquid assets.

Interoperability everywhere

In addition to handling large transactions, these platforms are also working on establishing cross-chain compatibility and introducing bank-approved cash settlement tokens. Last week, HQLAx, which operates on R3’s robust Corda platform with participation from HSBC, BNY Mellon, and Goldman Sachs, successfully executed a delivery versus payment (DvP) repo settlement with Fnality, a London-based fintech specializing in institutional-grade digital cash based on Ethereum’s permissioned version.

Last month, the digital ledger system (DLR) from Broadridge, constructed using the Canton Protocol smart-contract platform developed by Digital Asset, became compatible with JPMorgan’s JPM Coin. Notably, both systems operate on a privacy-centric variant of Ethereum. The DLR is currently being utilized by Commerzbank as well, and more banks are expected to be announced soon.

“Horacio Barakat, the head of digital innovation at Broadridge, stated in an interview that Broadridge’s collaboration with JPM Coin on the cash side represents the largest digital currency initiative globally. Furthermore, Broadridge is also the biggest collateral initiative in the world. Therefore, achieving interoperability between our initiatives is crucial for us.”

Mathew McDermott, the global head of digital assets at Goldman Sachs, highlights the inefficiencies present in traditional repo and securities lending markets as a result of decades-long accumulation of complexity and fragmentation.

“McDermott expressed his excitement about the potential of Digital Ledger Technology (DLT) to enhance current procedures and give rise to new industries such as intraday repo and intraday FX in an email. It’s impressive to witness the continued expansion and development of platforms like Broadridge’s DLR and HQLAx.”

‘Spaghetti mess’

For individuals engaged in securities financing, blockchain technology has long appeared as a promising solution. According to HQLAx CEO Guido Stroemer, the intricate web of securities that must be manually transferred between banks to fulfill collateral requirements is reminiscent of a chaotic spaghetti mess. This intricacy results in banks having to maintain costly excess collateral cushions, dealing with occasional settlement disruptions, and experiencing time lags that introduce intraday counterparty credit risk.

“Stroemer stated in an interview that by alleviating certain obstacles, banks could potentially save between 50 million and 100 million euros ($54 million – $108 million) annually. He further expressed his belief that this estimate is even on the modest side.”

According to Stroemer’s prediction, the HQLAx volumes are projected to exceed fifty billion euros by the year-end. With a robust instituional pipeline, we anticipate managing around 400-500 billion euros worth of activities on our platform in the long run.

Gateway drug?

In light of the widespread adoption of tokenization in the crypto industry, it’s intriguing to consider how these closed-loop systems will intersect with the public blockchain and Traditional Finance (TradFi) narratives. Although often overlooked, Broadridge’s intraday repo business could potentially offer the most suitable product-market fit within the tokenization sector, according to Rob Hadick, general partner at VC firm Dragonfly.

As a crypto investor, I’ve noticed a growing trend towards on-chain products taking center stage in the financial world. Wall Street insiders are starting to embrace this technology, and it’s an exciting development for the crypto community. However, it’s important to consider how this shift might impact public chains and the broader crypto economy. Some argue that it could serve as a catalyst, attracting more institutional investors and increasing demand for crypto assets. Yet, this belief requires a significant leap of faith, and it remains to be seen whether this will indeed translate into tangible value accrual.

“According to Broadridge’s Barakat, it’s conceivable that securities could be issued on a public network and settled with digital cash in the future. However, this would necessitate regulatory approvals, and there’s the inherent caution associated with introducing new technology, especially something as groundbreaking as using a public blockchain for repo transactions.”

“Barakat noted that if you hold back and wait for certain events to unfold, you might overlook the current prospects that emerge swiftly, such as the emergence of private and semi-private networks.”