Bank of America Merrill Lynch, Citi, Credit Suisse, J.P. Morgan, and the Depository Trust & Clearing Corporation (DTCC) successfully traded credit default swaps on the blockchain, according to an announcement today.
The test also included Markit, a data service firm, and Axoni, a distributed ledger company. Markit used smart contracts, which use blockchain to trigger an action when certain conditions are met, to create an electronic record of the economic terms for a security. The smart contract held information such as individual trade details and counterparty risk metrics, which provided a new level of transparency for partners and regulators, according to a press release.
Credit default swaps, which insure against a loan or credit defaulting, have had a difficult history on Wall Street and contributed to the 2008 financial crisis. Blockchain technology could make these complex financial securities easier to monitor.
The blockchain swap demonstrates one of the most noteworthy uses of the technology: the ability to reduce costs of keeping track of securities. Using blockchain tech could save investment banks $16 billion in clearing and settlements by 2020, according to financial services research firm Autonomous Research.
The DTCC has been open about its interest in blockchain. The clearinghouse, which keeps track of transactions for Wall Street banks, announced a partnership in March 2015 with distributed ledger tech startup Digital Asset Holdings,run by Blythe Masters, an ex-JPMorgan banker who is credited with creating credit default swaps.