Blockchain, the innovative approach to data management, has been the flavour of innovation for financial markets participants over the past year. So, what is blockchain technology? Blockchain is open-source digital-ledger technology that provides a secure way of making and recording transactions, agreements and contracts. However, rather than being kept in one place like a more traditional ledger book, the database is shared across a network of computers. It runs on specialised computer software that operates behind the scenes, automatically distributing information to the database as new transactions are made. To users, this translates to transparent real-time data and, importantly for financial markets, more efficient settlement and processing of transactions. In addition to increased transparency, cost benefits and efficiency, regulators have begun to recognise the potential future adoption of the new system despite a number of hurdles still ahead. Greg Medcraft, chairperson of the Australian Securities and Investments Commission (ASIC) said that this technology “has potential to fundamentally change our markets and our financial system”. Figure 1. The Blockchain Process Source: Financial Times Debt capital markets are beginning to leverage this technology to overcome inefficiencies in some current procedures. Processes such as calculation and payment of coupons could be completely automated. Similarly, interest swaps could be automated and applied to fixed income instruments. Higher regulatory capital requirements from banks, and increased competitiveness make the efficiencies of blockchain increasingly attractive. Commonwealth Bank of Australia (CBA) recently built a blockchain for debt capital markets (Blockchain Bond) which has been tested by Queensland Treasury Corporation (QTC) for the issuance of semi-government bonds. CBA’s prototype allows investors directly to enter their bid ticket directly into the blockchain via a simple interface. Throughout the process, the issuer sees the live bids in real-time and at the end of the tender, the issuer sees all bids by price and volume at each level. When they push a button to allocate at the best price for which they have sufficient volume, the system settles automatically, transferring ownership right away and facilitating payment at exactly the same time. QTC can generate a tender of bonds in digital form using “smart contract” technology that automatically pays coupons to investors when due. Because it has been designed as an “atomic transaction”, both title and payment is made at exactly the same time or neither occurs – the title cannot move without the payment which reduces, if not eliminates settlement risk. While this prototype can be used for other relatively illiquid market instruments like syndicated loans, it is yet to account for variables like secondary market sale and ownership (of liquid bonds) and pass regulatory approval before it can be implemented to a real deal. Moreover, the significant implementation costs have also impacted the momentum with which other debt market players leverage this technology. While global capital markets and governments are swiftly embracing this technology, it might be while before Blockchain picks up steam in Australia.