Notes 10–19
And we did it. In October, we successfully completed the first proof of concept in Colibrí, a blockchain-based collateral exchange for OTC derivative markets, becoming one of the first blockchain operations for the derivatives in the world, and the first in Latin America. The PoC improves the efficiency in the administration of the collateral, eliminates the settlement risk and provides a safe record of the collateral (press release here).
October was also a month in which authorities made pronouncements that generated consternation and frustration for derivatives markets and for blockchain and cryptocurrencies enthusiasts. On the one hand, the European Banking Authority (EBA) decided that for the calculation of the capital necessary to maintain the level of risk at tolerable levels according to the standards of the Fundamental Review of the Trading Book (FRTB), banks should include valuation adjustments of its derivative operations in profit-and-loss estimates, which makes it more difficult (volatile) for the market to determine the capital needed for these operations. On the other, at a G7 meeting, the Bank for International Settlements (BIS) presented a report on stablecoins, stating that they represent a systemic risk for financial markets; which was replicated by the FSB Regional Consultative Group (RCG) for the Americas that put the issue on the table in Mexico.
At the time, the U.S. Securities and Exchange Commission (SEC) filed a restraining order against the Telegram ICO for $ 1.7 billion for its own blockchain (Telegram Open Network, TON). The SEC seeks to prevent Telegram from flooding the US market with digital tokens (Grams) that were illegally sold (Regulation D), as the SEC considers them “investment contracts”. But the SEC also rejected a final attempt to create an exchange traded fund (ETF) of Bitcoin promoted by Bitwise Asset Management in conjunction with NYSE Arca, since it did not meet the legal requirements to avoid market manipulation or other activities illegal. To date, the SEC has rejected all ETF proposals on Bitcoin, quoting market manipulation and concerns about fraudulent activities. And to complete, Facebook faced a series of defections from Visa, Mastercard, PayPal, Booking Holdings, eBay, Stripe and Mercado Pago to its cryptocurrency project (Libra), who were “notified” of greater supervision of their payments activity at the event of staying linked to Libra. Therefore, Zuckerberg appeared before the Congress that asked him questions about Libra and how he is currently controlling the information of its users on its platform.
Despite this, perhaps the most important news of the year came when Xi Jinping made public his support for blockchain technology, and asked that China lead this field of innovation, which generated price increases for Chinese companies dedicated to that technology and an upward movement of the main cryptocurrencies: Bitcoin grew from $ 7,400 to $ 9,500 in just three days. It is no surprise, as China had already announced its decision to move forward with a digital currency issued by its central bank (CBDC).
On the other hand, authorities and infrastructure maintained their progress towards the benchmark rates that will replace Libor. The European Central Bank (ECB) first published the Euro Short-Term Rate (€STR) and will replace the EONIA reference; which allowed London Clearing House (LCH) to be the first CCP to clear swaps denominated in euros compared to the new €STR reference rate. Likewise, the Financial Stability Board (FSB) published its annual progress report on the implementation of the reforms agreed in the G20 to OTC derivatives markets, which highlights, although an advanced state of implementation, also a stagnation in certain jurisdictions, particularly in Latin America. Meanwhile, Brazil and Chile began their process of modernization of the exchange regulation, which in Chile includes the modifications related to the OTC derivative transaction repository; and authorities from Alianza del Pacífico agreed on a joint work agenda to improve financial integration. Meanwhile, in Colombia, both the Andi and Fedesarrollo’s survey indicate that the volatility of the exchange rate is the main problem of the local industry, which is reflected in that for the month of September the derivatives market moved us$ 30.8 billion in operations, according to Banco de la República.
The ecosystem for the institutional adoption of cryptocurrencies maintained its evolution around broader acceptance. Intercontinental Exchange (ICE) announced the execution of the first block operation in Bakkt Bitcoin Futures (BBF), which adds to the first physical delivery of Bitcoin against a futures contract; Swiss SIX Exchange (SIX) announced the issuance for stock trading of an ETF with a combination of Bitcoin and Éther, also guarded in the Bitcoin Suisse Vault; The Association of National Numbering Agencies (ANNA) announced that it would work to examine how ISINs can be used in the identification of digital assets such as tokens and cryptocurrencies; and Commerzbank, Deutsche Börse and MEAG, announced having completed the liquidation of a legally binding secondary market securities transaction through tokens, also used as collateral in Eurex Clearing as the central counterpart. And in Latin America, the Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais (ANBIMA) published a study that aims to facilitate the analysis and understanding of cryptoactives.
For this reason, the World Federation of Exchanges (WFE) urged the Financial Conduct Authority (FCA) of the United Kingdom not to prohibit derivatives on cryptocurrencies for retail investors, as said entity had announced in a regulation project. Perhaps in Colombia we could move forward if we include something within the regulatory agenda of the Unidad de Regulación Financiera that is published for comments.
In summary, the large infrastructures of the capital market have a clear vision of the enormous potential, for their future growth, that represents the distributed ledger technology (DLT). In the same month, the Depository Trust & Clearing Corporation (DTCC) presented its commitment to a market without compensation failures using automation, characterized by a contactless workflow, with a centralized data source and the elimination of almost all failures. As DTCC points out, blockchain could lead to zero reconciliations in market operations. That is only the beginning of its potential.
