A custom Bitcoin-based record-keeping system has been tested on credit default swaps (CDSs), we read on the Wall Street Journal website:
Banks including J.P. Morgan Chase & Co. and Citigroup Inc. have successfully tested the record-keeping technology behind bitcoin on credit-default swaps, a move that could help it gain a foothold in mainstream finance.
The swaps are essentially insurance contracts that pay off if a bond goes bad, and the process of keeping track of the over-the-counter products can be a burden. Banks match buyers and sellers, transmit the trades via a service run by data provider Markit Ltd. and send a record to Wall Street’s central bookkeeper, Depository Trust & Clearing Corp.
The new test showed that a portion of that record-keeping task could be accomplished using “blockchain,” a common ledger that each party can view in much the same way that multiple users can work on shared computer documents.
Analysts at Autonomous Research say using blockchain could cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion. A recent report by Citigroup forecast that automation including blockchain could eliminate two million banking jobs, largely in processing, over the next decade.
This has been a long time coming. A Bitcoin-based solution has now been tested in what looks like one of the first experiments involving more than just one bank. So, it has taken the banks more than two years since the outburst of media coverage on Bitcoin to develop an initial version of a possible record-keeping system. This might seem a long time, particularly that the system that’s been tested is nowhere near to real usability. On the other hand, it seems that Bitcoin is actually entering the financial landscape.
We’re skeptical that traditional settlement systems will be eliminated in favor of Bitcoin-related systems. Actually, even if the banks decide to move on the CDS settlement system, it might still take years before the system is overhauled. There are a lot of legacy systems in the banking world, and unless there is some serious cost cutting, the banks might not be willing to take that gamble just now.
There’s a flipside to this coin. The mentioned CDS system is only one of the possible applications of blockchain systems. It might just as well be the case that numerous other solutions will be explored in the wake of the initial successful of the CDS tests.
For now, let’s focus on the charts.