IHS Markit Has a Plan to Tokenize the $1 Trillion Syndicated Loan Market

There’s a lot of talk in the financial world these days about putting cash (the fiat kind) on distributed ledgers, but little action beyond proofs-of-concept.

That may soon change as IHS Markit, the market infrastructure giant, is developing a new blockchain-based system to handle the payments leg of syndicated loan trading – and eventually, a wider range of financial transactions. Revealed exclusively to CoinDesk, this system of smart contracts and wallets, known as Stax, is designed to eliminate the last mile of wire transfers, where each transaction has its own wire.

If successful, it should cut out the complexity and workload around cash reconciliation between parties in a syndicated loan, which can involve as many as 30 different banks.

Stepping back, the brave new world of digital assets can be broken down into distinct categories. First, there are the native digital assets we all know today, such as bitcoin. For financial players wary of the volatility and other risks of cryptocurrencies, a more alluring possibility is that central banks will decide to issue digital versions of their fiat currencies. But this may take some time to become reality.

In the meantime, a third, more practical approach is to use digital wallets to represent, in token form, some fiat money that has been deposited in a traditional trading account.

Indeed, this is what IHS Markit is doing with Stax, which will begin its testing phase this summer.

John Olesky, a managing director and the head of product management at the London-based company, explained that IHS bank customers will wire money into an old-fashioned account. The deposited amounts are then converted into digital tokens on a private network, and ultimately the digital wallets will allow for the ongoing settlement of transactions.

“We believe we can settle trades 24 hours a day. So you eliminate those wires and reduce time and effort,” Olesky told CoinDesk, adding:

“We don’t think that wire system procedures, technology and uptime should be barriers anymore.”

Loans and beyond

By themselves, syndicated loans represent a large and important market (over $1 trillion in issuance annually). A majority of it is settled through IHS Markit’s loan solutions platform, which was created in 2007, making it older than the invention of blockchains but a spring chicken by legacy financial system standards.

Unlike in many other DLT use cases, the aim of the new Stax system is not necessarily to make settlement near-instantaneous, just to make it simpler.

According to Olesky, the smart contracts decide when a trade is ready to close and perform the cash settlement, and so the system does not shorten the trade lifecycle. This can take up to 20 days for syndicated loans, which to some extent is deliberate in order to account for primary issuance and secondary trades, varying interest rates kicking in and so on.

“It’s not always about reducing time; for us, it’s about reducing work,” Olesky said. “If we can take something that involves ten steps down to seven, great.” […]

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