FinTechBlockchainBlockchain-enabled transaction trial proves successful for Commerzbank

Blockchain-enabled transaction trial proves successful for Commerzbank

Continental, Commerzbank and Siemens complete money market transaction in minutes rather than days thanks to blockchain technology

The rise of blockchain-enabled payments continues to gather pace following the successful completion of a money market transaction trial led by Commerzbank.

Continental, Commerzbank and Siemens conducted a test transaction as part of a pilot project to process a money market security using blockchain technology. The idea behind the trial was to experiment with blockchain technology in practice with a view to using it in the medium to long term for regular financial transactions as well.

The transaction, which took place earlier this year, had a volume of €100,000 and a term of three days. Continental was the issuer of the money market security, which was in the form of a euro-denominated electronic commercial paper according to legal requirements stipulated in the Luxembourg law. Commerzbank provided the Corda-based blockchain platform through its research and development unit, Main Incubator, and acted as a service partner. Siemens subscribed to the money market security as an investor. Corporate law firm GSK Stockmann provided legal advice on the blockchain-enabled transaction.

Blockchain-enabled transaction saves time

In this pilot project, the transaction was initiated and settled directly between the two companies. A regular securities transaction between two companies was used as a starting point. The companies not only generated the money market security, but also processed the trade (including payment processing) in a legally binding manner using blockchain. The documents and funds were exchanged in a matter of minutes rather than days using this process, avoiding the clearing system lag in the process.

The transaction was made possible because, unlike similar blockchain transactions that have been processed previously, it involved a security displayed entirely in blockchain form. The money market security was issued purely in digital form, with the purchase price amount in euros converted by Commerzbank – which has an e-money license – into digital money, so that payment could be made using blockchain. All requirements relating to this transaction were handled by digital and legally binding means using blockchain technology. Immediate value dating and real-time settlement were also possible. This is being regarded as the first step toward technical scaling of automated securities issues.

In the pilot transaction, the security was issued in accordance with Luxembourg law. Consequently, the security was issued, signed and traded digitally using a qualified electronic signature. In addition, for the security trade to be displayed directly and digitally as a delivery vs. payment transaction, the e-money held as financial collateral by Commerzbank was furnished digitally via blockchain, enabling the companies to exchange the security instantly for e-money.

Operator and service partner

Unlike with conventional transactions, Commerzbank was no longer acting as a broker between contracting parties for this particular transaction, but as a platform operator and service partner. It provided the platform and all the technical requirements for blockchain trading, the legal structure and the digital money for direct trading of the money market security (based on e-money as financial collateral, “cash on ledger”).

Stefan Scholz, head of Finance & Treasury at Continental, was pleased with the successful outcome of the project, and commented: “Blockchain made the process even quicker and more effective. Working with our project partners, Siemens and Commerzbank, we tested the feasibility of using blockchain in the Finance department and it proved to be a success. I’m proud of this pioneering achievement. We gained some new experience across various areas of our companies in both a technical and legal respect and also in terms of interlinking between the specialist departments.” Direct contact (including with investors in short-term bonds), considerable flexibility and efficiency combined with increased security, as well as enhanced transparency, are some of the advantages that Continental sees in using blockchain technology in the Finance department.

Peter Rathgeb, corporate treasurer at Siemens, added: “It was important for us to test this technology at an early stage and develop action points for the future. There are clear advantages of using this technology, including significantly shorter processing times and faster time to market. Some of the major challenges revolve around the security and performance aspects and the legal area, such as the importance of creating a consistent European understanding of the standards and legal points involved when it comes to blockchain transactions.”

Commerzbank are particularly interested in blockchain technology for operations such as money market transfers that involve short-term financing. The bank says blockchain will change aspects such as transparency, direct contact with investors and prompt settlement of transactions. Traditional aspects such as affordable financing costs and flexibility are particularly important with this form of short-term liquidity management.

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