In what could be a death rattle for the once-hegemonic London interbank offered rate (Libor), a competing index backed by two American companies today announced it would be using the ethereum blockchain.
Libor is a benchmark interest rate controlled by global banks including Barclays, Deutsche Bank, Royal Bank of Scotland and UBS that determines the cost for banks to lend money to each other. Ameribor is an alternative backed by the American Financial Exchange (AFX) and Cboe Futures and will use a permissioned version of ethereum and two tokens to do the same thing.
While the financial institutions behind Libor have been early leaders in exploring blockchain, they have been slow to implement the technology, which some believe could make some of their services unnecessary by directly connecting counterparties in trades. But the Ameribor use of ethereum shows one early instance of how a product previously provided by a group of banks is now being offered by upstarts and startups.
“We learned a great deal about this new and exciting technology and believe the blockchain has the potential to transform electronic trading and financial markets,” said AFX CEO Richar Sandor in a statement. “AFX is committed to remain in the forefront of this new technology.”
AFX was founded in 2015 and now has 150 members, and Cboe Futures is a part of the legacy Cboe Global Markets, founded in 1973 as the Chicago Board Options Exchange. The organizations’ Ameribor index was announced earlier this year, and quietly began trading using traditional technology in August. Previously, Sandor helped create some of the first derivatives on U.S. Treasuries and mortgage-backed securities, and in 2003 he founded the Chicago Climate Exchange for trading greenhouse gas emission credits, both of which represent industries that have been targeted for possible disruption using blockchain.
In the case of Ameribor, AFX will mint two non-fungible tokens for each party in a transaction. Unlike bitcoin, which is fungible, meaning every token is the same, these non-fungible tokens, compliant with the ERC-721 token standard, contain information about the transaction and the counterparty. The tokens are automatically minted by the AFX Blockchain when a transaction begins, and using the parity smart contract language are automatically settled when the transaction ends.
Unlike transactions on the public ethereum blockchain, which reach consensus through a process called proof-of-work that anyone can participate in, the AFX Blockchain uses proof-of-authority, meaning that while the tokens will be compatible with the public blockchain, AFX maintains a degree of control over the transactions.
In September 2019, former CFTC chairman Chris Giancarlo—a.k.a. Crypto Dad—joined the AFX board of directors. Giancarlo tells Forbes that while he agrees that Libor needs to be phased out, he doesn’t think a single index should replace it. Between 2012 and 2015 billions of dollars in fines and settlements were levied against the Libor banks who manipulated the rate to their benefit. Now, in addition to AFX’s work with Ameribor, Giancarlo says a number of specialized alternatives are rushing to meet the demand for trust-worthy, transparent alternatives.
According to Giancarlo, while the new secured overnight financing rate SOFR benchmark published by the New York Federal Reserve works well as a Libor alternative for big banks that have large holdings of treasuries and other securities to pledge in the repo market, Ameribor is better for small and regional banks that don’t have those holdings. The U.K. regulator that oversees Libor says it will end by 2021.
“I really believe that Ameribor is actually very complementary to SOFR,” says Giancarlo, who is also an advisor to the Chamber of Digital Commerce. “So I believe Ameribor is the right thing for America’s medium and small banks, and I really believe in market diversity.”