In order to make their business more efficient, Bankhaus von der Heydt (BvdH) launched a cooperation with Bitbond to implement a platform for the issuance of tokenized securities, digital asset custody and now Europe’s first bank issued stable coin.
With this project, Bitbond, once again takes a pioneering role in the digital assets market by successfully launching the stablecoin issuance technology as part of BvdH’s securities tokenization platform. The stablecoin dubbed EURB is the first fiat-backed digital euro issued directly by a banking institution on the Stellar protocol. Von der Heydt will not only be utilizing the EURB for the settlement of transactions on its platform but also open the stablecoin for external B2B2C use cases.
Using Bitbond’s stablecoin issuance engine, the bank now offers all parts of the value chain related to the issuance of securities from one single source. Clients of BvdH will benefit from a faster and more transparent settlement of payments and trades within the securitization process. The EURB stablecoin enables instant payment settlements, also known as instant Delivery versus Payment (DvP), thereby eliminating counterparty risk for all parties involved in a trade.
Central Bank Digital Currency (CBDC) has recently been a trending topic of discussion in the blockchain and financial ecosystem worldwide. In Europe, the ECB published a report stating its framework in regards to developing a digital euro.
What is a stablecoin? What is the role of stablecoins for the improvement of payments and settlement processes among financial institutions? In this article, we will attempt to answer these questions based on Bitbond’s experience as an industry leader in developing compliant blockchain products to improve financial services.
After defining and outlining the different types of stablecoins, this article will shine the spotlight on the functionalities of stablecoins, digital currencies, and CBDCs. Additionally, use cases of Bitbond clients will be mentioned to provide a practical understanding on how this technology works and what it is used for. Finally, you will get an insight into Bitbond’s full tokenization tech-stack.
Blockchain technology paved the way to a new crypto-asset class such as stablecoins. A stablecoin is more accurately a digital asset issued on DLT or blockchain. It holds the word “stable” in its name due to its value being pegged to fiat government-backed currencies that are usually less volatile than cryptocurrencies such as bitcoin and ethereum. For example, the price of the stablecoin pegged to a currency such as Euro does not fluctuate like crypto.
Stablecoins’ value is usually backed 1 to 1 by fiat-money or other types of assets therefore maintaining their “stable” value. As it is a new type of financial instrument, a single definition for stablecoins is yet to be agreed upon by legal bodies and industry experts. For instance, the recent proposed regulation for crypto assets by the European Commission (MiCA), distinguishes 3 types of stablecoins:
Each of the above can be created on different forms of blockchains or DLT:
CBDCs are issued by a central bank as legal tender. The Digital Yuan (CBDC currently being developed by the chinese government) is being issued on a private-permissioned blockchain, other CBDCs are likely to be issued on the same type of DLT which is controlled by a single entity: the central bank. Therefore, CBDCs differ from stablecoins as stablecoins are generally issued and transacted on a public DLT and are pegged by fiat currencies or other assets.
Advantages of public + permissionless blockchains are that, due to their open source nature, there is a lot of development of that ledger’s infrastructure, this makes it more robust. In addition, they typically are very secure if they reach a certain scale (many nodes maintain a copy of the ledger) and they have low operating cost.
Stablecoins or digital currencies are indispensable for contributing to the efficiency of payment settlements in financial transactions. Especially if it consists of transacting digital assets created on blockchain.
Current existing payment methods like bank transfers using SWIFT or SEPA already operate on sophisticated technological infrastructure. They are efficient for what they are and can be fast in performing their tasks (e.g. sending funds from one bank account to another in a matter of days). However, stablecoins issued on blockchain or DLT, outperform this conventional method on different levels as they leverage the power of blockchain technology by reducing the number of intermediaries needed. Blockchain also enables features offering a higher degree of programmability of the payments through smart contracts resulting in real time payments.
Firstly, stablecoins enable an instant Delivery vs Payment (DvP) mechanism, digital euros on the same chain as the respective token, allow true and instant DvP. In technical terms, this would be called an atomic swap, where the funds and assets are instantly exchanged as the stablecoin and security token are stored on the same ledger, this is achieved mainly by highly specific automation of payments (using smart contracts). In addition, stablecoins can also bring refinements to other processes: cross-border payments, micropayments, and security.
The instant DvP mechanism drastically reduces counterparty risk compared to conventional payment methods that usually take several days. The investors and issuers receive their designated assets instantly upon investment (within seconds or minutes). This is made possible thanks to the features described above.
As mentioned, the price of the stablecoin pegged to a currency such as Euro does not fluctuate like crypto. To settle tokenized securities transactions on-chain you need a digital payment method that allows an almost instant exchange of assets, this is what blockchain is capable of. Ideally, the stablecoin should exist on the same ledger as the token in order to unleash the full token potential.
Learn all about stablecoins, tokenization and use cases of a digital euro for commercial banks in this free lecture hosted by Radoslav Albrecht, Founder & CEO of Bitbond. Click here to watch to full lecture.
The Stellar Development Foundation (SDF) is a non-profit organization that supports the development and growth of Stellar, an open-source network that connects the world’s financial infrastructure.
Bitbond’s blockchain tech products operate on the Stellar protocol which is a public-permissionless digital ledger. The EURB stablecoin is integrated within Stellar and was successfully developed on Bankhaus von der Heydt’s securities tokenization platform which is powered by Bitbond technology.
The Stellar Foundation provided Bitbond with a grant to support development of EURB stablecoin and consulted with both Bitbond and BvdH regarding its technical integration.
BvdH is a private bank specializing in structured finance-related services. For example, Bankhaus Von der Heydt will typically create a securitization vehicle for investors who desire to invest in a security representing an asset portfolio.
Using conventional methods, this process takes an average of 6-8 weeks. BvdH was able to reduce that time period to only a few days thanks to Bitbond’s securities tokenization whitelabel solution:
Payment settlement is a core aspect in the investment process as funds need to be transferred from one entity to another. Legacy digital payment channels have proven to be time consuming and costly due to several parties being involved in the process, blockchain eliminates the need for such intermediaries. With the EURB stablecoin, BvdH can now take the paying agent functionality in-house and is able to offer fully fledged tokenization services to their clients including settlement at almost zero risk: on issuance date, at the end of the subscription period, securities are allocated instantly to the designated subscriber's wallet account against payment of purchase funds simultaneously received.
The rise of digitization in financial services is boosting the demand for bank-grade tech products able to be integrated into existing institutions’ financial systems. A lack of regulatory certainty relating to the usage of blockchain technology or DLT in some jurisdictions, prevents some market players from adopting blockchain technology to make their processes more efficient. However, in most financial institutions, the efficiencies that DLT can bring are being actively discussed.
2020 has been an important year in the shift towards innovation in financial services: new policies introduced by governments have empowered some incumbent financial organizations to start the implementation of blockchain technology in their systems. Consequently, more secure financial instruments such as the EURB stablecoin by BvdH or the JPM Coin by JP Morgan are rising in significance.
These tools allow banks like Bankhaus von der Heydt to drastically cut down on time, costs, and significantly reduce risks for their clients in their processes. Tokenization, stablecoin issuance and digital asset custody serve as practical examples of the potential of blockchain solutions in pioneering financial services. In the case of the EURB stablecoin, it is a means of payment which anyone can utilize without having to deal with the risk of 1st generation crypto-assets volatility such as BTC.
The fact that it is issued and maintained by a German bank in a segregated account, reduces risks and provides more optionality in the management of assets. Stablecoins are an indispensable tool which will lead to further financial stability and security during this period of blockchain technology adoption.