A group of Swiss banks, Credit Suisse, Pictet and Vontobel, issued tokenized investment products on the Ethereum blockchain testnet and settled fiat currency transactions. The tokenized securities were traded on BX Swiss, the FINMA-regulated Swiss stock exchange and a subsidiary of Börse Stuttgart.

The benefits of using blockchain include efficiencies that result in lower costs. Because settlement is invariably faster or instantaneous, counterparty risks are reduced. And in this case, the added nuance is the use of a public blockchain that can potentially allow for greater liquidity due to ease of access.

One of the blockchain promises is to cut out the middleman. However, regulations in many countries do not allow this for securities. Neither a central counterparty (CCP) nor a central securities depository (CSD) was involved in these transactions.

“This proof of concept demonstrated that trades made on the exchange can be settled on a public blockchain directly between participants,” said Matthias Müller, Head of Markets at BX Swiss. “It is no longer necessary for parties to secure a transaction by transferring tokens or cash to the exchange prior to trading. This is a significant advantage in terms of speed, cost, and risk management.”

He added: “The new regulatory regime for DLT-based trading platforms will allow BX Swiss to take full advantage of these developments.”

BX Swiss is one of only three Swiss trading venues authorized by FINMA, the other two being SIX and SIX Digital Exchange (SDX).

Digital asset firm Taurus provided the technology for the issuance of tokenized structured products, which included tokens representing baskets of shares issued by private banks Pictet and Vontobel, and a Credit Suisse structured note. The Capital Markets and Technology Association (CMTA) orchestrated the lawsuit.

“The transactions made today clearly establish that products tokenized on a public blockchain can be traded on regulated trading platforms and that the settlement of transactions in tokenized products can be done in fiat currencies without creating any counterparty risk,” said Daniel Gorrera, director. Digital assets at Credit Suisse.

A year ago, Credit Suisse was involved in helping a private company tokenize its capital into Ethereum using Taurus technology.

For the latest transactions, the CMTA developed a smart contract that was used for settlement to eliminate counterparty risks. This used a target-developed payment solution, DLT2Pay, that connects the blockchain to SIC, the Swiss Real-Time Gross Settlement System (RTGS).

“With a fully automated smart contract covering the entire lifecycle, the possibilities that can be expressed in pure code language are almost limitless, and blockchain technology can help design new generations of financial products,” said Marco Hegglin, Head Structured Solutions and Treasury Staff at Vontobel.

Other organizations involved in the transaction included UBS and custody technology firm Metaco.

UBS recently issued a DLT-based bond on the SIX Digital Exchange (SDX). In that case, the securities are held in a CSD and, in a novel twist, the investor can choose whether to hold it in the native SDX CSD or the more conventional SIX CSD. R3’s Corda enterprise blockchain underpins SDX.

Meanwhile, others have issued securities on the main Ethereum blockchain instead of the testnet. These included the European Investment Bank (EIB), Société Générale and Santander.