‘Ethereum-Based’ LIBOR Alternative Gets a Nod From Fed Chairman

The US Federal Reserve (Fed) Chairman Jerome Powell has seemingly expressed support for an “Ethereum-based” replacement of LIBOR, the average interest rate at which major global banks borrow from one another, stressing that it may not be suitable for everyone.

This alternative to LIBOR (the London Interbank Offered Rate), comes in the form of a permissioned “AFX Ethereum proof-of-authority blockchain”, as a transaction-based interest rate benchmark for banks, AMERIBOR, facilitated via the American Financial Exchange (AFX)’s electronic trading platform.

In response to a question from Senator Tom Cotton, Powell described AMERIBOR as “a reference rate created by the AFX based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s principles for financial benchmarks.” However, the Chairman stressed that 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.”

In either case, earlier this week, Dr. Richard L. Sandor, Chairman and CEO of the AFX said that “Chairman Powell’s response to Sen. Cotton’s question reinforces the importance of choice in the use of benchmarks and is key to the development of SOFR [Secured Overnight Financing Rate, or another alternative to LIBOR] and AMERIBOR,” which are complementary to each other.

AFX launched in November 2015, while AMERIBOR, developed together with the Chicago Board of Exchange Futures subsidiary, went live four years later. Since the start of the AFX and the AMERIBOR benchmark, more than USD 970 billion in value has been transacted, according to the company.

Upon the benchmark’s launch, Sandor said that it is AFX’s first major blockchain initiative, and that they “believe the blockchain has the potential to transform electronic trading and financial markets. AFX is committed to remain at the forefront of this new technology.”

Per the company, the AFX blockchain uses proof-of-authority consensus mechanism (unlike Ethereum’s proof-of-work, transitioning to proof-of-stake), thus leaving some control in the hands of AFX. It mints two non-fungible tokens for each party in each AMERIBOR transaction, which are compliant with the ERC-721 token standard, and which contain information on the transaction and the counterparty. The process of token minting and settling is automatic.

The news of this possible endorsement of something blockchain-related by one of the most conservative US institutions has traveled quickly through the Cryptoverse. The opinions are divided as usual though: while there are bound to be those who see this is a step forward for both blockchain in general and Ethereum in particular, others are wondering how much of Ethereum is AFX using.