Evaluating the Costs and Benefits of a Smart Contract Blockchain Framework for Credit Default Swaps

Abstract

Despite wide speculation about its use-value, there are very few large-scale Blockchain implementations, particularly in sophisticated financial applications and mature markets. The extent of Blockchain’s disruptive potential in these domains is unproven. This article considers Blockchain’s use-value for credit default swap contract execution, fulfillment and post-trade processing by using, as an assessment base, a series of derivatives industry whitepapers, academic and technological evaluative studies, and commentary relating to current market undertakings. In summary, when applied to credit default swaps, there are many barriers to implementation, as well as costs, fragmentation risks, technological deficiencies and practical drawbacks. As a result, there is some doubt on the extent of Blockchain’s short-term transformational value for complex financial structures and mature trading markets. This, at least in part, explains the fact that Blockchain projects are currently slow to materialize in derivatives and other financial market applications.

Keywords: blockchain, smart contracts, distributed ledger technology, derivatives, credit default swaps, credit derivatives