In Recent Test, Blockchain Brings Transparency To Notorious Credit Default Swaps

from ars technica

On Thursday, Wall Street’s bookkeeper announced that it had successfully tested blockchain technology to manage single-name credit default swaps (CDS) among four big banks: Bank of America Merrill Lynch, Citi, Credit Suisse, and JP Morgan.

In a credit default swap, one bank buys the debt owed to another bank with the understanding that if the debt holder defaults on their loan, the buyer bank will be compensated by the selling bank. In the years leading up to the 2008 recession, the buying and selling of credit default swaps was not watched by regulators at all, and as an NPR explainer described it in October 2008, “If bad mortgages got the financial system sick, credit default swaps helped spread the illness worldwide.”

The need for more transparency is where blockchain comes in. The concept of the blockchain ledger was developed and popularized by virtual currency Bitcoin, and on a blockchain ledger peer-to-peer transactions can be monitored by every entity that’s party to the ledger, theoretically resulting in more transparency. And recently Silicon Valley has pushed the finance world to appropriate the blockchain concept to make more traditional transactions more efficient, as well: if transactions are seamlessly recorded on a shared ledger, using a middleman to clear the transactions is no longer necessary.

More here.

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