Jerome Powell, the current Chair of the US Federal Reserve, recently stated that an Ethereum-backed blockchain project operating as a reference rate – called AMERIBOR – could serve as a potential replacement to LIBOR.
Blockchain Project To Replace LIBOR?
The London Interbank Offered Rate (LIBOR) has a significant role in global finance. It’s utilized to determine numerous metrics from the interest rates that giant corporations pay for loans to the rates individual consumers pay for student loans or mortgages.
However, some bankers using LIBOR reported false interest rates and ultimately manipulated the markets to boost their own profits. While this was undetected for years, when exposed, it became known as the LIBOR scandal. Since then, most world central banks have been searching for a replacement, including the Fed.
While the Fed continues to support the Secured Overnight Financing Rate (SOFR) as the Alternative Reference Rates Committee’s (ARRC) preferred alternative, Powell recently endorsed Ameribor as well, but with some conditions.
Answering a question raised by Senator Tom Cotton (R-AR) if the Fed supports alternative benchmark interest rates besides the SOFR, such as Ameribor, Powell said:
“We have been clear that the ARRC’s recommendations and the use of SOFR are voluntary. The market participants should seek to transition away from LIBOR in the manner that is most appropriate, given their specific circumstances.
Ameribor is a reference rate created by the American Financial Exchange (AFX) based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s (IOSCO) principles for financial benchmarks.
While [Ameribor] is a fully appropriate rate for the banks that fund themselves through the AFX or for other similar institutions for whom Ameribor may reflect their cost of funding, it may not be a natural fit for many market participants.”
Jerome Powell Source: BBC
Ameribor’s Ethereum-backed Nature
Ameribor uses blockchain as part of its determination of the rates. AFX CEO Richard Sandor noted that this is the company’s first blockchain-based project.
“We learned a great deal about this new and exciting technology and believe that blockchain has the potential to transform electronic trading and financial markets. AFX is committed to remain at the forefront of this new technology.” – Sandor explained.
AFX plans to mint two non-fungible tokens, unlike Bitcoin, for example, which is fungible (meaning every token is the same), for each party in a transaction. They will be compliant with the ERC-721 token standard and will contain information about both the transaction and the counterparty.
When a transaction begins, the tokens are automatically minted by the AFX Blockchain. When it ends, they are automatically settled by using the parity smart contract language.
AFX Blockchain, however, uses proof-of-authority consensus, instead of the proof-of-work one that Ethereum-based transactions employ. The PoA means that AFX will maintain a degree of control over the transactions, even though the tokens will be compatible with the public blockchain.
