UBS Is Using Ethereum Technology To Soften The Impact Of MiFid II
Posted by Tyler Durden on December 13, 2017 5:05 am
Tags: Barclays, Blockchains, Bond, Business, Counterparties, Credit Suisse, Cryptocurrencies, Database models, digital currency, Emerging technologies, ETC, Ethereum, European Securities and Markets Authority, European Union, Finance, Financial services, Global Economy, Gross Domestic Product, Hyperledger, Joseph Lubin, Legal Entity Identifier Regulatory Oversight Committee, MONEY, R3, Reuters, Technology
Categories: Barclays Blockchains Bond Business Counterparties Credit Suisse Cryptocurrencies Database models Digital currency Economy Emerging technologies ETC Ethereum European Securities and Markets Authority European Union Finance Financial services Global Economy Gross Domestic Product Hyperledger Joseph Lubin Legal Entity Identifier Regulatory Oversight Committee money R3 Reuters Technology
After devising blockchain-based systems to help facilitate equity and bond trading (remember Goldman’s cryptocoin?) as well as derivatives clearing, some of the leading banks in the blockchain space are banding together to build a system that they hope will help banks streamline another essential function: Compliance.
According to CoinDesk, UBS is leading an Ethereum-based project designed to make it easier for banks to reconcile a wide range of data about their counterparties. Barclays, Credit Suisse, KBC, SIX and Thomson Reuters have also signed on to the project. The project is meant to soften the impact of MiFid II, a set of new European banking regulations that will go live shortly after New Year’s.
Traditionally, regulated firms use what are called “legal entity identifiers” that are stored in a global data system to execute transactions on behalf of clients, even if those clients themselves don’t have one of the codes. But as part of a sweeping regulatory change called the Markets in Financial Instruments Directive (MiFID) II, scheduled to go live in the EU on Jan. 3, 2018, all eligible legal entities will be required to have and use these codes.
Instead of mandating that each of these institutions perform these checks independently, though, the banks built Madrec to mutualize much of the effort in a potentially industry-wide reconciliation process hosted in the Microsoft Azure cloud.
In an interview with CoinDesk, Peter Stephens, the head of UBS’s blockchain research and development efforts, explained how the system was designed, and to what end. Surprisingly, out of the many blockchain or distributed ledger projects that UBS is involved with (R3, Hyperledger etc.), Stephens said he expects the compliance project to be the first to go live.
Built over a six-month period, the platform evolved into a smart contract-powered network designed to integrate with identifiers endorsed by The Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) and others. The reconciliation of the LEI reference data includes industry classification and information from the European Securities and Markets Authority (ESMA).
Instead of each company checking the information independently, and reconciling the results periodically, the blockchain smart contracts will ensure accuracy in almost real-time.
To do this, the anonymized reference data is hashed to the Ethereum blockchain, while the source data itself remains within the institution. The smart contracts then reconcile the data, letting users quickly identify anomalies and reconcile them.
Since every eligible entity will be held to those same standards, Stephens argues that helping one another ensure the accuracy of their work will only positively impact their respective bottom lines, leaving room for competition elsewhere.
UBS is hardly the only major European bank that’s investing heavily in blockchain technology. In a presentation obtained by CoinDesk, Christian Nolting, also the bank’s global head of wealth, and Marcus Muller, global head of the CIO office, explained digital currencies and blockchain to their fellow bankers.
In the presentation, the bankers asserted that the “opportunities associated with blockchain technologies are huge,” and could be fully put into practice within the next few years.
And in what’s possibly one of most grandiose predictions about blockchain’s impact on the global economy, the bankers predicted that roughly 10% of the global gross domestic product (GDP) would be tracked or otherwise “regulated” by a blockchain by 2027.
Read the presentation in its entirety below: