itBit Bankchain to launch with delivery versus payment ledger for gold

Fintech trust company itBit recently hosted a roundtable where it announced the initial focus of its Bankchain initiative would be a distributed ledger system for the gold and precious metals marketplace.

The company said its Bankchain project currently has ten memoranda of understanding with a range of custody banks and players in the gold trading marketplace, and is at advanced stages of conversation with a dozen more.

Bankchain, which is set to launch later this year, is leveraging its trust company status to act as a custodian of assets via its pending membership with the Federal Reserve, DTCC and National Settlement Service.

The chief executive officer of itBit, Charles Cascarilla, told IBTimes the existing MoUs account for most of the gold ecosystem, from warehouses to dealers to custodians to buy-side firms to large gold companies.

He said: "The fact is that in the current gold market there is no delivery versus payment. Payments are happening either one day to five or six days difference from the movement of the asset. So that creates a lot of risk in the market and it's a big market. It trades $250bn a day which is more than US equity market. It's like the fifth or sixth largest asset class in the world - US dollar versus gold."

Cascarilla said the gold market as it is today is very capital intensive and uses up lots of capital because customers don't know when the assets are arriving, creating a lot of risk – to the point where participants have been withdrawing and pulling back.

He said he has heard a lot of market participants agree that the system needed to be fixed: "we didn't hear anybody saying - 'we like it how it is'."

As well as lowering capital charges and operating costs via automation, Bankchain is offering the ability to manage collateral more effectively.

"You can take the gold that you own on Bankchain and it's tokenised and move it around to institutions and use it as collateral. You could move it to the Chicago Mercantile Exchange and use it as collateral at the CME. At the end of the trading day you could move it to an Asian exchange, and then move it to Euroclear or other institutions," said Cascarilla.

The enterprise blockchain arena is a busy space where many startups are currently jostling for position, further fueled by the recent announcement of R3 to yoke the world's biggest banks under common standards and protocols. So was a focus on gold a way to stay ahead in that race?

Cascarilla said this was not a de-emphasis on other asset classes, but rather to avoid a situation where you end up trying to boil the ocean. He also admitted there was some urgency to execute at this time.

"I think everyone recognises that there are really big customers who are very interested by the market - so that's going to attract people to come into it. The reality is that means you have to execute and first mover advantage is important.

"So we recognise that as well and that's part of what has led us to this product roadmap that we have laid out and that we are very focused on. And we know that if you execute really well on your first use case you are going to be able to do more, but if you try to do a lot of use cases or involving very complex movements you could very well find yourself stillborn."

Bankchain's initial focus is not just on gold, but all precious metals. The geographic dispersal for now is mainly focused on New York and London. Asia is seen as a future roll out prospect. Cascarilla said other commodities including certain types of base metals and even energy and other types of consumable commodities could be added as an ancillary service.

"We are focused on these kind of non-consumable precious metals now, and the next stages would be involving some kinds of either base metals or energy commodities. They are a little bit more tricky because they are consumable so it's harder to track the ownership, but there is a huge problem in terms of matching the movement of the commodity to the payment in those areas too. But I would say that is a second phase," said Cascarilla.

Looking towards next year, Bankchain is building out systems around collateral management more broadly and unregistered securities in the first and second quarters of 2016, and the company is also looking at cross border payments.

On the subject of payments Cascarilla said: "We wanted to make people understand that being a trust company allows us to do things that are different from what others can do. We are able to make sure that we not just track the movement of assets, but also can instruct the movement of payments, which is a big differentiator.

"It allows us to then be able to address assets in a new way because you can create more or less instantaneous settlement times not just instantaneous asset movements. Being able to move assets is great but being able to do both is really the kind of sine qua non of the back office and allows you to move counterparty risk."

"Every use case actually is payments, so doing cross border payments is really simply just one half of what we are launching with all of our precious metals anyways," said Cascarilla.

In terms of the technology itself, he explained the system is comprised of two layers. "One is where we have what we would call a books and records system; that's what a ledger is, or a shared ledger or a shared database.

"It's really an enhanced book entry system because you are not just moving the ownership of the asset; depending on the asset and the use case, you are moving 25-50 different pieces of metadata with the movement of the asset.

"So you are not just changing -'I own the asset/I don't own the asset' - you are saying here is all the information that relates to it: where it's been, who has it now, who might be the beneficial owner etc. We called it an enhanced book entry system.

"Then there's also a smart contract layer that's native obviously to having that kind of book entry system. But you can also have smart contracts that are more bespoke, that also govern the way those assets move.

"And that could be like: I will pay you five gold bars if the price of oil goes to $200 by June of 2020, from warehouse in North America to a place in London - you could go on and on about all of the things you could do to make smart contracts govern the movement of the enhanced book entry asset."

Cascarilla said users connect to Bankchain through APIs into the system. He added that users on Bankchain can interact with people that are not on the system. He said this capability was also down to being a trust company and being able to interact with the current financial architecture as a regulated financial entity.

"That's important. It's interoperable with participants that are not on Bankchain. We recogise no matter how much we really want the world to be on Bankchain at day one, that's impossible."

"That's important. It's interoperable with participants that are not on Bankchain. We recogise that no matter how much we really want the world to be on Bankchain at day one, that's impossible."