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The technology isn’t the challenge

Innovations and new technologies are largely financed through the capital market. But the institutions in the financial market themselves are also working intensively on new technologies. Blockchain technology has played a central role in this for a number of years. “It’s something extraordinary,” said well-known digitization thought leader and bestselling author Don Tapscott in 2016 about blockchain. “A non-tamper-evident, non-hackable decentralized database of digital assets. That is a platform for truth and a platform for trust. The consequences are enormous, not only for the financial industry, but also for practically all areas of society ”. Five years later, the great revolution is still a long time coming, but the financial industry is now relying on the blockchain in some areas to become faster, more efficient or more reliable.

Safe environment for innovation

“Blockchain technology is a technology that can be used, but not absolutely necessary,” emphasized Angelika Sommer-Hemetsberger, CEO of Oesterreichische Kontrollbank AG, at the sixth Future Forum of the Vienna Stock Exchange. Technology should never be an end in itself, but always create added value. The Austrian capital market has been dealing with which this could be in the case of blockchain for a number of years. “The Austrian capital market is very safe and crisis-resistant. Therefore, all players in the financial market can deal with new technologies ”, said Sommer-Hemetsberger, deputy chairwoman of the supervisory board of the Vienna Stock Exchange.

Blockchain projects in Austria

The Kontrollbank is one of the pioneers among financial market institutions that deal with areas of application for the blockchain. The technology was already used in real operation in 2018. “When issuing government bonds, we already used the blockchain in a support process; specifically in data notarization. It worked so well that it is still in use, ”explains the Kontrollbank board member. In this case, the goal of using the blockchain is to increase security. With the help of notarization based on blockchain, the authenticity of the original document is guaranteed. For this purpose, an unmistakable electronic fingerprint, the so-called hash value, is determined from documents using an encryption process. This hash value can be clearly assigned to the source document, but vice versa does not allow any conclusions to be drawn about specific data content.

A new, very broad-based research project was started in Austria in 2021, which is not only breaking new technical ground. The “DELPHI” project is about testing the issuance of federal bonds against the issue of a digital euro. So no longer just a support process, but the issue itself. “The purpose is to find out whether it is technically possible, what the legal framework must be and whether the whole thing is economically feasible,” summarizes Sommer-Hemetsberger .

The Oesterreichische Nationalbank (OeNB), the Austrian Federal Financing Agency (OeBFA), which manages the national debt, the OeKB CSD GmbH, the subsidiary of the Austrian control bank specializing in the central safekeeping of securities, as well as the two major banks Erste Group and Raiffeisen Bank International ( RBI). The research project simulates how an Austrian federal bond can be issued and processed as a security token on a blockchain. For this purpose, the OeNB will provide a so-called CBDC (Central Bank Digital Currency), i.e. a digital currency issued by a central bank.

Decentralized Finance: New (controversial) paths in the financial sector

While institutions such as the National Bank and Kontrollbank are researching blockchain projects, an entire industry has already emerged in the private sector around “Decentralized Finance” (DeFi). “Decentralized finance works outside of the traditional banking system. These are open protocols on which, for example, you can hide your crypto currencies against interest, ”explains Alfred Taudes, head of the Institute for Crypto-Economics at the Vienna University of Economics and Business.

Around 90 billion dollars are currently under management in DeFi systems. Systems that the economics professor finds interesting from a research perspective because they work very differently than the traditional financial market. “Decentralized exchanges do not have an order book like a classic exchange, but they have liquidity pools that stabilize prices through arbitrage. You can earn interest on that, ”said Taudes. Until then, you could only bet on the price development.

“You also have a new kind of governance. This is very important. Such systems usually have their own governance tokens and a decentralized governance system ”. It is “definitely attractive to show new ways of approaching basic problems in the financial sector”.

The regulated financial sector need by no means feel threatened, emphasizes the Viennese economist Stefan Schmitz. The global financial market is estimated to have a volume of around 400 trillion dollars – the 90 billion dollars in DeFi are comparatively negligible, says Schmitz. “Actually, we are dealing with a banking system without a banking license, without equity capital, without liquidity reserves, without supervision, without regulation, without a governance structure. In my opinion, this is not a valid business model ”.

“A complex, but very good system”

Sommer-Hemetsberger is also convinced that regulation is needed to be able to scale such solutions at all. It is very important that only regulated players are involved in the DELPHI research project: “If such a solution is to be suitable for the masses, it must be regulated and these players have experience with it”. Investor protection also plays a central role, emphasizes Schmitz: “The traditional financial system has created a complex but very good system when it comes to the question of who I give my money to and how they then deal with it”.

As an expert in macroprudential supervision, Schmitz also sees certain risks that DeFi harbors for the traditional financial world. The direct interface to the financial world is essential, usually via banks: “Many of these stablecoins are exchanged for dollars. So I need access to the traditional financial system. However, many of these entries are not among the top addresses worldwide ”. Governance risks and technological risks are also relevant.

Blockchain in settlement

Traditional stock exchanges already rely on blockchain technology in some areas. Most of the projects focus on the settlement area, i.e. the fulfillment of a stock exchange transaction. The Swiss stock exchange is currently developing a combined settlement and trading system based on blockchain, which will soon go into real use. And according to Taudes, something is also happening at the European level: “I recently wrote a paper with the National Bank on what the European settlement system could look like on a blockchain basis”. The advantage of such a solution lies in its speed and flexibility: “These systems can then trade relatively generic assets, not just traditional securities, but also, for example, crypto assets, if that is possible from a regulatory perspective”.

In Austria, an important digitization step in stock exchange trading has been achieved this year with a change in the Depot Act. “A digital global certificate is now completely equivalent to a physical one for papers such as bonds or certificates. But what does not yet work on this basis are stocks. You would have to intervene very intensively in company law, ”explains Sommer-Hemetsberger. What she would want would be a harmonization of the legal systems concerned in the EU – because in the end the technological challenge is not as great as the regulatory one.

Blochchain in the financial world: 6th Future Forum of the Vienna Stock Exchange to look up:

Arjun Sethi
Passionate guitarist, gamer and writer. Lives for the perfect review, and scrapes texts until they are razor-sharp.


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