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Ashwin Kumar and Eric Müller speak about the new concept of a collateralised coin: Combining the best of two worlds

Release date: 30 Jan 2017 | Eurex Clearing

Ashwin Kumar and Eric Müller speak about the new concept of a collateralised coin: Combining the best of two worlds

Deutsche Börse developed a concept for riskless peer-to-peer transfer of commercial bank money via a blockchain-based infrastructure, using the functionalities of a central counterparty (CCP). In this interview, Ashwin Kumar, Global Head of Product Development at Deutsche Börse Group, and Eric Müller, CEO of Eurex Clearing, speak about the new concept of a collateralised coin.

 

Eric, can you tell me what a collateralised coin exactly is? What makes this different from other blockchain concepts?

Eric Müller: The collateralised colored coin infrastructure, short “CollCo”, is a vehicle for payments on the blockchain that is based on the margining respectively collateral functionality of a clearing house. What it ultimately does is mitigate credit risk in tokenised coins via collateralisation at our central counterparty Eurex Clearing.

How does the CollCo work in detail?

Eric Müller: The members of a clearing house issue commercial bank money on the blockchain. Each participating clearing member can issue their own colored coin, i.e. tokenised commercial bank money, if it provides respective collateral via the clearing house.

If a clearing member or their registered customers trade on the blockchain and the colored coin changes owner to another bank or to a customer associated with the other bank, the coin changes its color to that of the other bank, representing now commercial bank money of the other bank. The clearing house moves the respective amount of collateral to the collateral account of the other bank.

Ashwin, what’s the benefit of this model?

Ashwin Kumar: The purpose of the CollCo is a real-time transfer of tokenised commercial bank money backed by the margining/collateral capabilities of our CCP, Eurex Clearing.

Commercial bank money entails credit risk of the issuing bank. In the “real world” this risk is currently eliminated by netting the obligations of Bank A and Bank B and settlement of the resulting balance in central bank money. CollCo eliminates the risk in real-time by transferring the collateral concurrently to the digitised coins – each customer holds coins of his or her own bank and thus carries only credit risk of his or her own bank.

Who makes sure that rules are observed in this process?

Eric Müller: The overall governance of the CollCo relies with a trusted third party, possibly a clearing house and entails a clear rule set and process descriptions such as a CCP rule book including margin request and default management procedures. The infrastructure will also entail tailored access for audit and supervision processes.

The third party is responsible for the injection and extraction of colored coins to or from the blockchain and ensures “proper accounting” for colored coins, and can admit new banks or clearing members onto the CollCo infrastructure. These can admit their customers to the CollCo infrastructure themselves. Of course, this also has to happen in line with the rules and regulations of the clearing house and must be known to it.

Are there already potential use cases for this concept?

Ashwin Kumar: CollCo addresses existing and potential new use cases. These include the handling of margining requirements, credit risk free payments, and delivery versus value asset/value transfer on the blockchain. As Eurex Clearing interfaces with the Group's central securities depository Clearstream, CollCo may also be used as settlement coin and thus offers the potential for efficiency gains in post-trade processes like settlement and asset servicing.

What are the next steps?

Eric Müller: We will now consult with clients, regulators and central banks to obtain feedback on our concept. A functional and technical prototype based on Hyperledger Fabric is currently being developed. We also filed a patent application.

How does this project fit in with your other initiatives in this field?

Ashwin Kumar: CollCo perfectly ties in with the Group’s overall blockchain activities. We want to explore the great potential that distributed ledger technology has. By combining blockchain technology with proven existing post-trade infrastructure and services, we aim to realize efficiencies and investigate possible new business opportunities enabled by this technology.

Recent activities of Deutsche Börse Group in the blockchain area include building a blockchain solution for cross-border collateral transfer in cooperation with the “Liquidity Alliance” as well as the joint development of a functional prototype for the blockchain technology-based settlement of securities with Deutsche Bundesbank. We also take part in Linux Foundation’s Hyperledger Project, where we have become a premium member. Moreover, Deutsche Börse has taken a minority stake with a board seat in Digital Asset Holdings, a New York-based company developing blockchain technology software for financial intermediaries foremost.