Paxos, a global securities depository and blockchain technology provider, has completed a pilot test for Euroclear Bankchain, a settlement service for London bullion.
The service combines Euroclear’s settlement activities with Paxos’ blankchain platform. The service is designed to reduce risk, improve efficiency, and minimize balance sheet constraints for gold market participants.
More than 600 OTC bullion trades settled in a two-week period for banks including Citigroup, Scotiabank, MKS PAMP, Societe Generale and INTL FCStone. All are part of the Euroclear Bankchain Market Advisory Group that now 17 participants, according to Paxos.
Bankchain delivers instantaneous settlement and greater automation, providing reduced counterparty risk, lower capital requirements and improved operational efficiencies.
The settlement of unallocated gold is capital intensive. The new platform reduces capital charges for market players via instant settlement and delivery versus payment.
“This is a real first step in bringing a new settlement capability to the London bullion market that will help lower risk and simplify the post-trade process,” said Angus Scott, director, product strategy and innovation at Euroclear, in quotes reported by Reuters.
The teams will integrate feedback from the pilot test in the next few months. Another market simulation is scheduled for early 2017. It is scheduled to go live in 2017.
Seth Phillips, Bankchain product director at Paxos, said the pilot has helped refine the Bankchain platform. He said the level of market participant engagement was extensive. Participants were excited to see how fast their feedback could be incorporated into the platform.
Euroclear has explored the regulatory and legal aspects of blockchain technology in post-trade settlement in a European context.
The report, Blockchain Settlement: Regulation, Innovation, and Application [PDF], with support from Slaughter and May, found that central securities depositories would play an important role in a blockchain-based settlement system.
It also stated that regulators should not fear the use of smart contracts and distributed ledger technology any more than any other automated computer-based process prevalent in the settlement industry.
As “custodians of the code,” central securities depositories could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts.
The Royal Mint partnered with CME Group earlier this month to develop a platform to trade physical gold, according to Reuters. RMC contracts are backed by gold from the Royal Mint’s bullion vault, while blockchain technology supports digital record ownership. The contracts are set to begin trading in 2017.
IXE Group recently launched an approved stock exchange and is planning a spinoff gold settlement and processing service called TradeWind Markets.
The London Bullion Association also plans to launch a gold trading platform and trade repository. Meanwhile, the London Metal Exchange will deploy gold spot and futures contracts in 2017.
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