Background: Project Ubin is a project launched in 2016 by the Monetary Authority of Singapore (MAS) and the Association of Banks in Singapore. The project explores the use of distributed ledger technology (DLT) for the clearing and settlement of payments and securities. In Phase 3 of the project, the Project Ubin team successfully implemented DLT for “delivery-vs-payment” (DvP) settlement of tokenised assets on two separate blockchains.
Phase 3: In Project Ubin Phase 1, the team successfully tokenised Singapore dollars (SGD) for interbank payments. Project Ubin Phase 3 builds on this earlier success by attempting to settle payment and exchange of tokenised SGD and securities assets. The project explores DvP settlement in a setting where cash and securities are implemented on different blockchains. In other words, interoperability is an absolute requirement (Note: This set-up implicitly acknowledges that the exchange operator and bank/central bank are typically separate and distinct entities).
How is DvP settlement is achieved: Buyer and Seller submit orders to the matching engine -- match is made -- matching engine generates a secret and a hash password shared with the seller via PDF file -- seller creates an instruction (Seller First Securities Instruction) which basically confirms the assets sold, agreed payment and situations when the assets will be transferred to the Buyer. One of these situations is when the buyer supplies the secret that matches the hash password -- a smart contract is created which locks up the assets to be sold by the seller.
The above sequence is repeated for the buyer in respect of the cash amount (e.g. buyer creates First Cash Instruction, cash amount is locked via smart contract...)
Seller verifies Buyer’s First Cash Instruction -- Seller claims agreed amount of cash from Buyer. The transaction reveals the secret -- Buyer receives secret -- Buyer creates instruction to claim assets and inputs secret...AND IT’S DONE!
Why it is important: Ravi Menon, Managing Director of the MAS, refers to real-time settlement as "a holy grail in the world of finance that we must collectively solve". The primary benefit is to eliminate risk of a seller taking money without delivering goods (i.e. settlement risk). This is achieved using contract locks, which locks up the cash and securities that are the subject of the trade. Settlement failures scenarios are addressed through automatic recovery enabled by smart contracts and the use of an arbitrator. Other key benefits include:
- Compression of settlement cycle or even 24/7 real-time settlement
- Use of smart contracts to programme rulebook conditions and compliance requirements
Major themes: The project involved three technology partners: Anquan, Deloitte and Nasdaq. Each proposed different solutions using different blockchain protocols, with their specific strengths and weaknesses detailed in the report.
After reviewing the report, I noticed that some themes/features are emphasised:
- The role of a regulator remains paramount in blockchain applications in financial markets. It is a misconception to conflate “Distributed” with “decentralised”. All aspects of DLT, such as protocols and algorithms, are centric implementations.
- An arbitrator must be appointed to resolve disputes, ensure transaction integrity and protect market participants.
- Secret and hash password will be delivered off-chain to buyer and seller via encrypted and password-protected PDF file. This is intended to ensure that the secret is not made known to other participants in the blockchain network.
What's next: The next step of Project Ubin explores the feasibility of cross-border DvP. The MAS has started work with the Bank of Canada to link their respective blockchain platforms to test instant, 24/7 settlement of cross-border payment transactions. A full implementation of such a system promises faster, cheaper and more efficient cross-border payments. Interested? Check out the report here!