The World Bank considers Australia as a global leader in blockchain development, after the Australian Securities Exchange said in December it would retain US-based Digital Asset Holdings to replace its equities clearing and settlement system with a blockchain-based system. This is forcing many institutional investors in the Australian market to get their heads around the technology, which came to prominence for powering Bitcoin before being adapted for different use cases by the very institutions it was designed to circumvent.

"One of the reasons we were interested to work with CBA in the Australian market is the Australian government is known to be interested in advancing the use of these technologies, and the DAH/ASX project is an example of Australia pushing the envelope," Mr Snaith said. "We know Australia has a tolerant view on where technology can help business."

The deal shows how fast blockchain has moved from research and development and a pilot phase to real world, market applications.

The private, 'permissioned', decentralised software has been built on the top of the Ethereum platform. Nodes containing a copy of the ledger of ownership will run in Sydney and Washington. Unlike other capital markets trials of the technology, there will be no paper-based back-up. The system is being hosted for the World Bank in a Microsoft Azure cloud, and the global tech giant has validated its operational capacity and security.

"This is the first step towards how capital markets will look in the future," said Sophie Gilder, head of blockchain at CBA.

The deal is not yet realising the full potential of the technology. Payment has been kept off the chain, and will be made through existing rails using the SWIFT system. Both CBA and the World Bank said they hoped payments could be incorporated in the future.

But this would require the Reserve Bank of Australia to back a digital version of the Australian dollar, and for the government to remove the Goods and Services Tax (GST) on fiat-currency linked tokens, which currently makes it uneconomical for the technology to process payments.


Efficiency gains

The World Bank said the system was a vast improvement on current processes for ordering and transferring ownership of bonds. This typically involves orders being phoned in, taken down by a sales rep into a blotter, sent to the issuer, and manually put into other systems, before a ticket is written that is transferred to a registrar. It's a slow, manual process.

The World Bank said a blockchain system is a vast improvement to current processes for ordering and transferring ownership of bonds. Shutterstock.com

Further complicating the status quo, ownership records are held by the central bank, clearing house, various custodians, broker-dealers and the customer plus their advisers. Various channels – emails, Bloomberg chat, confirmations and custodian reports – provide records of transactions.

This means each party has to conduct multiple reconciliations to conclude an average bond sale. This is a cost impost, and creates 'operational risk'. But with the new system, all parties are able to trust a single platform as the recorded on the ledger of ownership, operated by both CBA and World Bank.

"We always look for innovative opportunities and like to engage," said Justin Chapman, the London-based global head of market advocacy and innovation research at Northern Trust, which is considering investing in the deal.

"When you look at the digitisation of bond issuance through the lifecycle, DLT creates efficiencies and transparency and there is lots of opportunity from automation that takes friction out, and it allows us to transact instantaneously with full trust."

The World Bank's Mr Snaith said blockchain "provides an immutable and append-only record that can be almost instantaneously updated when a transaction takes place within seconds. That is the fundamental difference: if you have an trusted record, there is no need for every participant to have their own copy of their position. If everybody trusts the ledger, all we need to do is point to it to know and report our positions".


James Wall, the executive general manager of international at CBA, said the system will integrate with existing Bloomberg terminals, allowing investors to send data into their existing tech systems.

The new system allows investors to put their orders directly into the software, which manages the bookbuild and distributes the securities. It also manages the payment of coupons and, in the future, could run secondary market trading.

Because orders and transactions are time-stamped on the "chain" and the technology does not allow them to be altered, Ms Gilder said it improves transparency and will enhance reporting.

Law Firm King & Wood Mallesons acted as legal adviser on the deal. QBE and Treasury Corporation of Victoria have also had input on the transaction.

Regulators in Australia have been briefed on the deal. In the future, regulators could be given a node to allow them to see a bookbuild processes.

In Australia, the typical legal structure for bond ownership is based around a deed poll and accompanying register; this deal uses the same structure.

Under NSW state law, the register of who owns a bond must be held in one location. In order to comply with that, CBA, as registrar, will maintain the register. The legally recognised ledger is an extract of the distributed ledger's trusted record of all transactions.

The World Bank engaged with CBA after seeing reports of the blockchain experiment it did with Queensland Treasury Corp in early 2017 involving semi-government bonds.

The World Bank said it could roll the technology out to other markets given its commitment to capital markets innovation. This has also seen it create the first global bond in 1989, and the first swap deal in 1981, which involved exchanging debts with IBM.