Blade Labs, May 21, 2024
Atomic Settlements: The Next Leap Beyond T+1 with Blade Labs
The quest for efficiency and risk reduction always remains paramount in financial settlements and the concept of atomic settlement is set to redefine settlement processes in the evolving space of global finance. The future of traditional settlement seems bleak given the myriad challenges circumventing the process of transaction. Below is a brief of some of the challenges that impedes traditional settlement.
Navigating the Maze of Intermediaries: Traditional finance involves multiple intermediaries like —brokers, clearinghouses, custodians—all with their unique processing times and procedures. Therefore, the more intermediaries in a transaction, the longer the transaction chain. Moreover, more intermediaries may lead to increased opportunities for operational error, greater need for compliance checks, and higher processing costs. Intermediaries can also affect clearing and settlement timing, leading to delays due to differing operating hours across jurisdictions. These delays may raise costs for intermediaries maintaining pre-funded accounts for liquidity management (Source – https://www.bis.org/events/cpmi_ptfop/proceedings/paper11.pdf)
Time Delays T+1, T+2, and Beyond: The processing and settlement of transactions in conventional systems can take several days, T+1, T+2, or even longer settlement periods. During this time, the assets and their corresponding payments are in a state of limbo, which amplifies counterparty risk.
Lack of Synchronization: In traditional systems, the exchange of assets and payments often occurs in a sequential rather than simultaneous manner. This lack of synchronicity increases the risk of one party defaulting after receiving the asset but before completing the payment.
System and Operational Risks: Traditional systems rely on complex infrastructures resembling intricate clockwork. However, complexity breeds vulnerability leading to operational errors and system failures, further complicating the settlement process.
Data on transactional costs incurred due to traditional settlements indicate a direct impediment in conventional transactions. As per reports JP Morgan estimates that global corporates move nearly US$23.5 trillion across countries each year, equivalent to roughly 25% of global GDP. The annual transaction costs for the companies have reached US$120 billion relying on “sub-optimal wholesale cross-border payment processes.” (Source – https://www.kapronasia.com/asia-payments-research-category/why-atomic-settlement-could-be-a-game-changer-in-cross-border-payments.html)
The challenges faced by conventional transactions have raised an increasing demand among businesses for faster, cheaper and more efficient cross-border payments. And atomic settlement perfectly fits in this scenario to address the challenges faced by traditional finances. It ensures that both payment and delivery occur simultaneously minimizing risk, relying on smart contracts to enforce the terms of the exchange. It breaks each complex transaction into its atomic components and settles them all simultaneously.
In the Asia-Pacific region, which globally stands at the forefront of digital payments innovation, atomic settlement is already being adopted by a number of different entities. China is already operating a T+0 system. In November 2022, the Monetary Authority of Singapore (MAS) introduced Project Ubin+ to explore atomic settlement solutions for cross-border foreign exchange (FX) transactions using wholesale Central Bank Digital Currencies (CBDC). (Source – https://www.mas.gov.sg/news/media-releases/2022/mas-launches-expanded-initiative-to-advance-cross-border-connectivity-in-wholesale-cbdcs)
Earlier in March, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in India introduced trading in the T+0 rolling settlement cycle in the equity segment on an optional basis. (Source – https://www.livemint.com/market/stock-market-news/t0-settlement-kick-starts-today-what-does-it-mean-how-does-it-affect-you-11711594988012.html)
Accelerated modes of settlement have also found considerable momentum in countries like US, UK and Canada moving towards T+1 standard with technological advancements.
The innovation of Distributed Ledger Technology (DLT) forms the core of atomic settlements where digital securities and cash are exchanged instantaneously on a DLT platform. The promise of DLT to achieve real-time, simultaneous settlements holds immense benefits for financial institutions and regulators.
While atomic settlement has been a challenging issue in traditional financial systems due to delays, intermediaries, and a lack of synchronization, DLT offers tools and features such as smart contracts, reduced intermediaries, increased transparency, and decentralization that can address these challenges and facilitate atomic settlements.
Why DLT is Well Suited to Help Solve Atomic Settlement:
Smart Contracts – By leveraging smart contracts which are self-executing agreements, DLT ensures that assets and payments exchange hands simultaneously. These encoded agreements ensure seamless, real time settlement only if all conditions are met, thereby achieving atomicity.
Reduced Intermediaries: DLT can streamline processes by reducing the number of intermediaries needed to verify and process transactions, thus decreasing the points of potential failure, friction and delay.
Transparency and Auditability: DLT provides a transparent and immutable record of transactions, which can be audited in real-time. This reduces the risk of disputes and increases trust among parties.
Decentralization and Redundancy: DLT’s decentralized nature ensures that there is no single point of failure, which can increase the robustness and reliability of the settlement process.
Instant Settlement: With DLT, the possibility of near-instantaneous settlement becomes viable because it operates continuously and can process transactions in real-time or near-real-time. By eliminating any time gap between trade execution and settlement, DLT achieves instant settlement. This is the blockchain equivalent of the concept of delivery versus payment (DvP)
Blade labs is leading the charge in atomic settlements with an array of end-to-end services for tokenization of assets. Leveraging DLT, we facilitate seamless cross-border settlements that can drastically simplify business transactions. Following the Digital Asset Platform model outlined in the IMF’s February 2024 report, Blade offers a Digital Asset Platform (DAP) with an extensive selection of components across multiple layers:
– Access Layer: Integrations for seamless user interaction, including wallets and API gateways.
– Service Layer: Advanced services for asset management, including KYC/AML workflows, asset custody workflows and key recovery.
– Asset Layer: A diverse range of asset classes, from CBDCs to real estate and non-fungible tokens.
– Platform Layer: Blade’s services are operational on multiple networks designed for seamless integration into any existing technology.
(Source – https://bladelabs.io/digital-asset-platform/)
These components can be easily mixed and matched to align with the unique requirements of enterprises and businesses. Blade’s atomic settlement platform stands ready to offer business a chance to achieve real time settlements overcoming the challenges faced by traditional transactions. To explore the possibilities, visit our website at https://bladelabs.io/.
Blade can act as the trusted partner offering these solutions that are tailor-made to meet organizations’ specific needs. Blade has established a trust centre with certifications and audits ensuring industry-standard procedural compliance and Band A Certik Security. Blade has already achieved industry-standard certifications such as SOC2 and ISO 27001, which is testament to our commitment to the safety and security of data. Visit our website at https://app.vanta.com/bladelabs/trust/f865xtlybiyr5fg9drrde for more information about our trust centre.
Kasturi Sharma
Senior Content Writer
Blade Labs
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