Deutsche Börse, Commerzbank in blockchain-based repo solution

Deutsche Börse and Commerzbank have announced that they have successfully completed the first-ever proof-of-concept (POC) for a repo transaction using the blockchain. In a jointly issued press release, the two German banks executed a legally binding settlement of the transaction using distributed ledger technology (DLT), which was conducted as part of a joint POC to determine the feasibility of blockchain technologies in settling securities.

A repo transaction is commonly associated with short-term borrowing deals, allowing dealers to sell securities to investors and subsequently repurchase them, often as soon as the following day. The security seller refers to the process as a repo, while the purchaser refers to it as a reverse repurchase agreement. 

The banks explained, “For the transaction, digital tokens were generated for both commercial bank money (cash tokens) and securities (securities tokens). Distributed ledger technology was then used to execute the simultaneous swap of the tokens as a legally binding transaction. Deutsche Börse acted as the cash provider, Commerzbank as the borrower and main incubator, Commerzbank’s research and development unit, acted as the blockchain platform operator. The technology used and the underlying legal concept were developed jointly by the partners.”

The success of the operation shows that the DLT is a feasible and viable solution to conduct legally binding and transparent movement of tokenized securities, as well as cash. Since the blockchain is able to provide a mechanism for the immediate transfer of assets, the transaction is able to be settled in real time. This ultimately means that there is reduced risk to the counterparty, the purchaser, and a reduction in capital expenses associated with the transaction. 

For the POC, the banks used a public note of KfW Bank Group that amounted to €10 million (around $11.31 million) on a seven-day term with an interest rate of -0.5%. The CEO of Commerzbank’s R&D unit, Michael F. Spitz, states, “Through the systematic development of blockchain technology, DLT is increasingly gaining in importance for a growing market. In past pilots we have focused on new issue projects; with the transaction between Deutsche Börse and Commerzbank we were now for the first time able to convert existing securities into digital tokens. We are delighted to support the transaction as a platform operator and, together with Deutsche Börse, to have reached such an important milestone in the adaptation of this future technology for the capital market.”

This is another example of the power of the blockchain in the facilitation of financial transactions. Being conducted by two global banks gives the technology an added boost, as it provides a solid foundation for other banks to understand the legitimacy of the blockchain in managing their transactions.