Smart Bonds

Transcript

[Music] yeah good morning ladies and gentlemen my name is Stefan kesek I am here on stage today with Ian Kon we work for UBS a large Swiss bank and we are in the crypto 2.0 lab of UBS that's part of the Innovation group um group Technology Innovation and we are very happy to be here today and talk about smart bonds an experiment that um the crypto 2.0 lab is conducting so um the goal of the lab is

to explore blockchain technology we have defined a set of use cases and um we are going to apply blockchain technology and evaluate um how we can we can best um make use for the bank and for our customers so uh most of the work we do is actually learn and listen so we are talking to a lot of solution providers to a lot of developers a lot of software vendors and um other partners we also doing a lot of Education most of the education is done internally but but we're also talking to to other financial institutions we are

part of the rri Consortium the distributed Ledger group and we also talk to infrastructure providers central banks um governments um Regulators um because we we all want to understand how can we best apply blockchain technology to finance so um we are very committed to um enabling developing and promoting Open Standards and so that's why we like ethereum so much it's a very nice very good open standard a powerful technology that we can use we like the flexibility that it provides so we can basically

Implement arbitrary complex business logic we can put um a lot of different types of assets on the blockchain and um model whole life cycles of financial instruments and we will see in a in a minute uh one of the one of the experiments the actually the earliest the first experiments that we did in the lab with etherum and I I just uh want to go quickly into the the benefits that we see or some of the some of the early learnings that we are taking from this so it's a it's a very nent technology yeah so we are still in a in a very early phase and I agree completely with Gavin I guess

guess it was in in one of the first talks um that he said um we we need to implement in order to understand the full potential of this technology and we need to to play around with it in in in order to to get a feeling for what is possible in the future and I've I've just um shortly followed the presentations before I mean obviously we are still part um if you remember this this layered thing we are still part of the of the lower um uh of the lower sphere with the with all the regulations and all the jurisdictions in place but we definitely see there is a lot of innovation coming towards us and we are here to learn and we are here to share with you what we did so um the first

experiment um we did in that space is smart bonds actually we could yeah so smart bonds who who of you knows um how a bond works all right so then maybe just just very quickly a bond is a a basic form um of a loan so you have um an issuer uh on one on on one side on the left side who issues the bond that's typically a company or an organization or a government um that needs to raise funds they need to finance their operations they need to uh Finance their business and on the other hand uh on the other side you have investors you have the buyer of a bond that's typically institutional investors and the

interesting thing is in between yeah so this here is a very very much simplified uh model in between you have a whole bunch of intermediaries of trusted third parties you have Central counterparties you have uh Central Securities depositories you have custodian Banks actually it's layers on layers of intermediation and we think uh bonds are a very good um example to show the benefits and the potential of a technology that is here to dis intermediate yeah and to replace those Central trusted parties with something else and that's software actually we we

can show in our proof of concept that we can replace a lot of those intermediaries with a piece of software yeah for them that's not a very comforting thought but um it's actually very very interesting um to see that in action and that's what Ian is going to show us so Ian please um show us what we did thank you Stefan so yes so Ian Cen I'm I'm a technologist in in the crypto lab as Stefan has has indicated um I I'm I'm the one who got to play um we we call them experiments but it's it's it's fun so smart bonds what do they look like well we we took a very simplistic approach um

we've got a fair fairly small set of contracts to to implement the platform for for the experement um contracts you'd look if you looked at them you'd say they're they're rather monolithic um you know we know there's there's work to be done in that space But but fundamentally we have the the main Bond contract which is the effectively the arbiture of all the actions we we then have a a coin so we have a token um one of the early things we identified was the need for a for a token to allow onchain settlement rather than rather than going offchain so so we've we've called our boncoin um maybe not too imaginative but but it but it worked for our purposes um we needed to

to simulate the concept of of trusted feeds so we have a benchmark contract which obviously would be providing rates for for floating rate bonds and then we had a a simple registry um which in the real world scenario you know we need to extend to to to create true you know kyc Etc Etc so you know Fair fairly simple structure um as you can see on the screen so just a few few parties involved but but the primary actors are obviously the bond issuer and the bond investor um what I'll do now is I I I'll actually walk you through the the demo and and fingers crossed at this point so so on the screen in front of

you now is as you can see a very simple UI we've built to to to demonstrate the functionality that that we have in in the smart Bond platform um what what we've got on the left hand side is the bond issuer um nice nice and orang and and a nice nice name there issuer and on on on the right hand side we have the the bond buyer so um in this instance we've got eth um PLC will be issuing the bond and big fund who will be buying the bond so obviously as I said the the ax is involved here have gone through a registration so they've got access to the platform um we ski that step so so what I'll do now is I I'll

put on the hat of the of the of the bond issuer and and now I'm going to create a new offer to place into the market um I've I've pre-filled everything out so in in this instance we're going to we're going to choose a fixed rate bond uh paying a 2% um we'll have a a coupon frequency of 6 months and the bom will last a year and and I know you're going to worry now that I'm going to make you sit around for a year to see the the payments occur but software is a wonderful thing so we've actually manage to speed up time so this should should take place in a few minutes so I I'll submit that offer um so the the issuer gets a notification that the the the transaction's been

accepted and it's now being pushed into the into the network so this is all running on my laptop at this point so so hopefully it can keep up so in in a short in a short while the there's there's a single minor in this instance here they'll mine the block and both both parties should see a confirmation of of the new Bond offer and and this is obviously the point at which I I I hold my breath and cross my fingers MH so we are waiting for the confirmation now and and this is where I quickly check

I'm not sure it's oh look there we go here we go patience patience is a virtue so there we go so both parties saw the saw the offer being confirmed on the chain and there we have a new entry Bond number 40 um being issued well the author is from eth PLC um as as we said a 2% coupon one onee maturity um now as if I put the Hat on of the buyer I can now go and and create register my interest in in that Bond so what I what I do simply here is I'm I'm going to invest a million B coins so I've I've I've registered that interest um one of the things we did for

this is is we we built in a escro capability so the the when when you register your interest that you actually make the purchase of that point and there's obviously different models you could you could take take to solving this problem but at this point we we we we we capture the funds and hold them in escro and they're held in escro by by the bond contract so the issuer at this point will not see any any of the money not until they actually complete the issurance and and handam me over the bonds so we just wait for for that that to be confirmed that there we go and if I just go and check my account there I can see that I've I've made a payment of million coins and it's actually gone to

the bond contract so so at this point the issuer still got not got the money but obviously it's the issuer I can now now I've got my interest obviously in the real world scenario there'll be be many interested parties so we we'll go and issue that Bond and we'll issu the full amount we added the capability in the platform to do a reduce the level if the if the bond was over subscribed and and then the then the issuance would occur on a Prater basis and you'd get a refund but but with the full amount here so so I've I've now now issued the bond and and when that gets confirmed if I look at if from the issue of standpoint if I look at my account I should see the million Bond coins in my my account and obviously traditionally

once the bond has been issued what what would what would previously happen is we'd have other parties that would then essentially be recording who owns the bond and who needs to be paid at the appropriate times um so there we go the issue's been confirmed so let's check the account of the of the of the issuer and there we go we've we've had a million coins from the bond contract but but let's let's check cuz hang on am am I is is the holder and actually officially holding that Bond so let's have a look so big fund there we go uh a th000 10,000 bonds to the value of a million coins um the the good thing about um ethereum and and obviously blockchains is is we can see all the

events that have occurred all the transactions that have occurred so we get a full history so we can see the offer the indication of interest and and the actual issuance um as you can see there so the maturity and coupon dates are just just be a few minutes so so hopefully we won't run out of time and we should see some payments occurring but as I say the the the system now is replacing what would typically be the paying agent so that so the contract itself will will pay out the funds and and you know we followed the pretty much the standard for for um token contracts so you you have an approved um essentially what we call a signatur on the account and the bond contract acts as that

signature okay so that that was a very quick um demo while um maybe maybe we um need to uh make a way for the next ones so we are around for the whole day we happy um if you want to catch us and and um ask questions that's very fine for us um thanks a lot for your attention thanks for the [Applause] invitation