UBS Bank Is Experimenting with ‘Smart-Bonds’ Using the Bitcoin Blockchain

Bitcoin Magazine
UBS Bank Is Experimenting with ‘Smart-Bonds’ Using the Bitcoin Blockchain
ubs

During his talk at IDX Derivatives Expo in London, Alex Batlin, UBS Bank’s chief Information officer for innovation (CIOI) shed some light on what the financial institution has been working on in their innovation lab: smart-bonds on the Bitcoin blockchain.

International Financing Review Asia (IFR Asia) reported that the smart-bonds were described by Batlin as bonds where “risk-free interest rates and payment streams were fully automated, creating a self-paying instrument.”

“The key attraction is that there is no middle or back office, and no registry, so clearly a major impact on costs,” said Batlin.

The Innovation Lab

Smart-bonds are one of the first publicly confirmed technologies the Swiss banking giant is said to be exploring since the launch of The innovation Lab in April to explore how blockchain technologies could improve the banking sector. The creation of the lab came after the publishing of an extensive report about the benefits of the blockchain by the international bank.

When the report was published, UBS Group CIO Oliver Bussmann told the Wall Street Journal, “I believe – and this is my personal view – that blockchain technology will not only change the way we do payments, but it will change the whole trading and settlement topic.”

Since then, that hypothesis has begun to get some traction as the Nasdaq OMX Group began experimenting with a pilot of blockchain technology as a record-keeping ledger for the Nasdaq Private Market, a small market launched in 2014 to handle the trading of shares belonging to private companies.

Smart-bonds likely is just one of several technological applications of blockchains UBS’ lab is exploring. The lab, which is located in the London offices of European fintech startup accelerator Level39, is meant to spur new innovations that can bolster the bank’s long-term growth.

“Blockchain technologies can make banks more efficient – for example, through instantaneous settlement rather than the days it takes at present, lower costs and lower operational risk,” said Batlin during the IDX Derivatives Expo in London. “The simple lesson for banks is that if we don’t do it someone else will.”

Difficulties remain

Bitcoin’s proof-of-work mining algorithm is responsible for the digital currency’s unique characteristics of network security and decentralization, but as Batlin pointed out, it is also causes the system to be slow and expensive. Transactions on the Bitcoin blockchain often take a hour or move and require large amounts of electricity via miners who verify transactions. These hurdles eliminate the possibility of high-frequency or algorithmic trading, as least as it currently stands.

“All kinds of revenue opportunities can emerge,” said Batlin speaking of how these innovations could be monetized, “but it’s still more expensive, so there is a way to go.”

 

UBS sign” by twicepixCC BY-SA 2.0 

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Swiss Tax Authorities Confirm that Bitcoin is VAT-free in Switzerland
no-vat

Bitcoin Association Switzerland reports that, according to the Swiss Federal Tax Administration, no VAT applies to bitcoin in Switzerland. The transfer of bitcoin doesn’t constitute delivery of goods or services, and therefore it’s not subject to VAT.

“This is the most reasonable way to classify bitcoins in the context of VAT, and we are fortunate that the tax administration agrees with our view,” says Luzius Meisser, president of Bitcoin Association Switzerland. “Bitcoin is a currency, and thus should also be treated like a currency.”

In February 2014, a group of three Swiss Bitcoin organizations jointly wrote a formal inquiry to the Swiss Federal Tax Administration to clarify the legal situation of bitcoin with regards to VAT. The tax authority replied that bitcoin is to be treated just like any other payment option – trading bitcoin for Swiss francs is seen as similar to trading euros for Swiss francs. Furthermore, the transaction fees charged by bitcoin exchanges are VAT-free.

“This is excellent news for bitcoin in Switzerland as it provides the legal certainty we need to professionally operate our business,” says Niklas Nikolajsen, CEO of Swiss bitcoin exchange and service provider Bitcoin Suisse AG.

Other European nations have made similar decisions. Recently, the Spanish tax office confirmed that, under Spanish law, bitcoin has been recognized as a financial service, and therefore the cryptocurrency isn’t subject to the nation’s 21 percent VAT.

In the European Union, which Switzerland is not part of, there is not yet clarity on the VAT status of bitcoin. In June, however, the European Court of Justice in Luxembourg is expected to hold a hearing on the matter, Handelszeitung reports.

“We hope that the Swiss decision can serve as an inspiration for Europe,” said Mathieu Buffenoir, vice-president of Bitcoin Association Switzerland.

Bitcoin is now confirmed to be exempt from VAT in Switzerland, but other regulations apply. Switzerland considers digital currencies such as bitcoin equivalent to any other foreign currency. This means that the professional operation of bitcoin trading platforms constitutes financial intermediation with the requirement to comply with both the Banking Act and the Anti Money Laundering (AML) Act. Recently ECUREX, a digital finance marketplace for professional traders and financial institutions headquartered in Zurich, announced that it has become the first digital currency exchange platform to be fully compliant with both.

Switzerland, a modern country in the middle in Europe with a world-class financial system, a stable regulatory environment, and a thriving economy unencumbered by the often lengthy and ineffectual bureaucratic procedures of the European Union, is emerging as a good location for bitcoin businesses.

In related news reported by Handelszeitung, preparations are under way for the establishment of the first bitcoin bank in Switzerland, according to multiple sources in the financial sector. The bitcoin bank would be set up as a normal commercial bank connected to the banking network and compliant with the Banking and AML Acts, and able to offer all standard banking services. Bitcoin Magazine is following the story and will report in detail once more information is available.

 

Photo by Antana / CC BY-SA 2.0

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BitLicense Blowback No Surprise to NYDFS Officials
lady-liberty

Just as it seemed like the dust was settling around the New York Department of Financial Services (NYDFS) BitLicense regulations released last week, Erik Voorhees of ShapeShift.io raised new criticisms of the NYDFS, calling them “Orwellian” and making comparisons to North Korea.

NYDFS’s Matt Anderson was not surprised, telling Bitcoin Magazine: “We always recognized that there is going to be some part of this community that is against even pretty standard financial regulatory oversight measures, such as anti-money laundering controls and other consumer protections. That said, one digital currency company has already received a license from NYDFS and a number of others have stated they intend to seek BitLicenses shortly.”

Although ShapeShift.io is a Switzerland-based exchange, it has cut off service to it’s New York State customers who are redirected to its website PleaseProtectConsumers.org, with an explanation of why they are leaving New York and how bitcoin and blockchain technology can prevent fraud and identity theft.

The website calls on other digital currency companies to suspend service to their New York state customers and redirect its website to the PleaseProtectConsumers page.

Voorhees’ company ShapeShift.io, which provides exchange services without asking customers for identifying information, recently launched the first digital currency exchange app for iOS.

Lots of unhappy campers in the Bitcoin community

In the week since the final BitLicense regulations were released digital currency companies and organizations have been weighing in, and it hasn’t been a pretty sight.

There weren’t enough changes between the second and final drafts to satisfy most of the original criticisms – that changes in the company’s products will be held up by a lengthy approval process, that smaller startups won’t have the cash to apply and that customers’ private information should not end up in the hands of government bureaucrats.

In addition, several company executives noted that there should have been an exemption for multi-sig products in the final draft noting that these don’t involve the company having full custody of customers’ bitcoin.

Organizations such as the Coin Center are concerned that other states will follow suit and use the BitLicense program as a template. The nonprofit advocacy group Coin Center has launched a tracker that compares government policies about digital currencies between states.

 

The glass is half full

However, there was some recognition among bitcoiners such as Circle CEO Jeremy Allaire that the BitLicense program actually gives added credibility to digital currencies among the public and brings it inside the circle that includes governments.

Cameron and Tyler Winklevoss have been supportive of the BitLicense program and are waiting for their license to launch their NY Gemini exchange, saying “we feel like it’s weeks …”

Writing at Nasdaq.com, Martin Tillier says: “Some of the regulations are sensible and, by increasing public confidence in the currency, could give the growing industry a serious boost… There is no reason that Bitcoin-related businesses should be exempt from requirements that apply to other financial concerns, although it should be noted that they don’t stop criminal behavior. Bernie Madoff, et al, have proved that over the years. What they do, however, is increase consumer confidence, an important development if Bitcoin is to gain widespread acceptance.”

As NYDFS’s Matt Anderson notes: “Ultimately, we believe that prudent regulation will be important to building greater consumer confidence in digital currency and sparking wider adoption.”

Job creation by government

Meanwhile, enterprise compliance company Identity Mind is selling its services to company compliance officers and administrators offering assistance in complying with BitLicense rules.

And, not to miss an opportunity, the New Jersey legislature sees a chance to lure disaffected digital currency business from New York State by offering tax breaks to these companies.

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