Will financial markets turn into a huge blockchain? – Finance

Axa IM has just bought € 3 million in EIB bonds from SocGen. Why is the news interesting? Because these bonds are “tokens”, digital tokens, and the operation took place not on a market, but on the Ethereum blockchain. Does this foreshadow the stock market of tomorrow?

At the end of last year, the asset management arm of the French insurance giant Axa carried out its first market transaction based on blockchain technology. Axa IM purchased bonds issued by the European Investment Bank (EIB) from SocGen for 3 million euros. These securities are somewhat particular because they are issued in the form of tokens on the public Ethereum blockchain.

At the end of last year, the asset management arm of the French insurance giant Axa carried out its first market transaction based on blockchain technology. Axa IM purchased bonds issued by the European Investment Bank (EIB) from SocGen for 3 million euros. These securities are somewhat particular because they are issued in the form of tokens on the public Ethereum blockchain. If this confuses you, rest assured, you are not alone. However, behind these technical terms lies a real revolution that, one day or another, could affect us all. The blockchain is known to the general public because it is the technology that allowed the existence of cryptocurrencies, and in particular bitcoins. Recall that, unlike a classic database, centralized and managed by a single trusted actor, the blockchain is a shared database with a large number of actors who will validate each new block. Because each new information (for example, in the case of bitcoin, each transaction or each issue of a new bitcoin) enriches the database and brings a new stone to the building, a new block to the chain. The validity of this block is checked. In the case of bitcoin, this verification is done by “miners”, who compete with each other – the fastest wins – and who are paid (in bitcoins) for this purpose. The other side of the coin: they use an enormous amount of energy to run their programs. Once the block has been validated, it is added to the chain of previous blocks to form this shared register. The system is cryptographically secure and unalterable as many users own the registry. As for tokens, they are digital authentication tokens that can be traded on a blockchain. These tokens can authenticate anything – a cryptocurrency, a digital artwork, a financial security, etc. But why are Axa IM and SocGen, instead of going through traditional trading platforms, mobilizing the blockchain? “Technology brings us two interesting aspects, says Laurence Arnold, Head of Innovation Management and Strategic Initiatives at Axa Investment Managers. The first is decentralization. The ledgers can be updated instantly for everyone at the same time. The second aspect is programmability. of payments. ” Because one of the strengths of the blockchain is also that of allowing the development of “smart contracts”: these are programs that allow certain operations to be carried out automatically if a series of predefined conditions are met. It is thus possible to automatically activate the payment of the coupons of a bond once the ex-dividend date is reached. “There is often confusion between blockchain and bitcoin, but we are far from cryptocurrencies. We are on the underlying technology,” emphasizes Laurence Arnold. Would this technology allow for an increase in efficiency? And how? “In wealth management we are in extremely intermediate environments, recalls the manager. There are regulators, institutions at all levels and there are many varied databases, at various levels, that require meaningful reconciliations. We are currently testing this technology to see how could improve our efficiency and open us to other markets as tokenization can allow us to switch to other asset classes bonds in the form of tokens, we have removed the central depository which is the institution that has a registration role, custodian of securities registers financial terms. This allows us to see what this implies, in operational terms, but also in legal terms. How do you qualify a token in legal terms? How do you prove you own it? ” This blockchain revolution is still in its infancy. But it shakes a lot of people: asset managers, banks, clearing houses, custodians, etc. “Many financial players are rethinking their model, Laurence Arnold abounds. For example, we are seeing the emergence of new professions such as custodians of digital keys on financial assets.” European regulators have taken up the matter. A few weeks ago, Member States approved a three-year pilot program for market infrastructures based on this technology. “This pilot scheme will allow us to test security tokens in the form of stocks or bonds,” says Laurence Arnold. For blockchain to replace traditional exchanges, it will still take some time. Obviously, the European pilot scheme will have to be confirmed. And you will need to fix the pieces of the puzzle that aren’t there yet. “Above all, a digital currency is missing, a blockchain currency, observes Laurence Arnold. This is why we support the European Central Bank in creating a digital euro”. Without the digital euro, the transaction remains hybrid. “In the transaction that was carried out with SocGen, we still had to pass the cash through traditional bank accounts, while on the contrary we do not have traditional securities”, explains the head of innovation of Axa IM. If there had been a digital euro, there would have been the automatic delivery of the settlement, with cash tokens versus security tokens, “silver tokens” versus “securities tokens”. Other obstacles have yet to be removed. “Our clients obviously ask us security questions, notes Laurence Arnold. We have set up blockchain security working groups to answer these questions.” There is certainly no evidence that there are security holes. But last June, the FBI managed to recover part of a bitcoin ransom that the operator of the colonial pipeline had paid to a group of hackers. But it’s unclear how the FBI agents gained access to the criminals’ cryptocurrency wallet. The use of the blockchain also raises environmental problems. “Blockchain technologies are getting greener. But we’re not there yet,” he says. Finally, there is a problem with standardization. There is certainly the establishment of a pilot scheme in the European Union, but there is no standard or regulation governing security tokens and digital financial assets. And it will be necessary to ensure interoperability between systems. “There are public and private blockchains, assets, liabilities that work differently,” concludes Laurence Arnold. We will have to build bridges between all of this. ”

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