Smartbond (monetary system)
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A smartbond or smart-bond[1][2] is a term for a bond where rates and payment streams are fully automated, creating a self-paying instrument.[2] Smartbonds may exist by instantiation on a blockchain[2] or in the code of a Distributed Autonomous Organization (DAO).
Smartbonds in general
Smartbonds typically use smart contract capabilities of blockchain databases that can operate as cryptographically-secure yet open and transparent general ledgers.[3]
A key benefit of the smartbond technology is the elimination of the "middle or back office", as well as the bond registry, substantially reducing the cost of servicing the bonds. Additional benefits include the potential for instantaneous settlement, rather than the days it required in 2015, as well as lower operational risk.[3]
But high costs are also present in the bitcoin blockchain and protocol that was being used in 2015: "Transactions can take an hour or more to verify and it requires large amounts of electricity via miners who verify transactions."[3]
History
As early as 2014, banking executives were speaking publically about the ability of blockcahin technology to trigger significant "simplification of banking processes and cost structure."[4]
As of 2015[update], UBS was experimenting with smartbonds that use the bitcoin blockchain[1] in which "risk free interest rates and payment streams [could be] fully automated, creating a self-paying instrument."[2]
The Smartbond monetary system
The term Smartbond has also been applied to a monetary system, instantiating a currency of the same name, which operates independently of any government institution.
The system implements economic principles including the Friedman k-percent rule (with the money supply growth rate fixed at some specific percentage), and the avoidance of fractional-reserve banking.[5] The rules of the Smartbond system also include a guarantee that all money supply growth is distributed as interest to currency holders, and an exchange rate floor (against USD) backed by reserves.[6] The system uses blockchain technology to keep track of units of the Smartbond currency. This allows for its rules to be applied automatically rather than through the institutions of a sovereign state, as a traditional monetary system.[7]
Context
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During the period that followed the financial crisis of 2007-08, major economies introduced quantitative easing (US, Eurozone, Japan) and subsequently negative interest rates (Eurozone, Japan, Sweden, Switzerland). These policies of expanding the money supply and setting zero or negative interest rates have been consistent with central bank mandates for targeting inflation, given the accompanying deflationary environment. The Smartbond system in contrast follows a predetermined money supply growth, and imposes that this growth can only occur through interest earned by currency holders. As a result, there is no policy-making discretion to expand the money supply beyond its predetermined growth trajectory, or to suppress interest rates.[8]
References
- ^ a b Ross, Rory (2015-09-12). "Smart Money: Blockchains Are the Future of the Internet". Newsweek. Retrieved 2016-05-27.
- ^ a b c d Wigan, David (2015-06-11). "Bitcoin technology will disrupt derivatives, says banker". IFR Asia. Retrieved 2016-05-27.
- ^ a b c Jenn, Sarah (2015-06-15). "UBS Bank to Launch Cryptosecurites Also?". NewsBTC. Retrieved 2016-05-27.
- ^ Irrera, Anna (2014-10-27). "UBS CIO: Blockchain Technology Can Massively Simplify Banking". Wall Street Journal. Retrieved 2016-05-27.
- ^ "Smartbond – An Introduction". smartbond.fund. Retrieved 27 May 2016.
- ^ "Smartbond – Frequently Asked Questions". smartbond.fund. Retrieved 27 May 2016.
- ^ Desan, Christine (2014). Making Money: Coin, Currency and the Coming of Capitalism. Oxford, UK: Oxford University Press. p. 11. ISBN 9780198709572.
- ^ Sloman, John; Wride, Alison; Garratt, Dean (2015). Economics (9th ed.). Harlow, UK: Pearson. p. 657. ISBN 9781292064840.