By Helen Bartholomew

LONDON, Sept 25 (IFR) - KfW has issued its first euro commercial paper using distributed ledger technology. The pilot transaction was led by Commerzbank and sold to MEAG, the asset manager of Munich Re and ERGO, as part of a test of the new technology in the sale of money market instruments.

Although issued using traditional processes required by regulators, the 100,000 transaction was simultaneously replicated on a blockchain. The technology, which underpins cryptocurrency bitcoin, creates a decentralised data structure that forms the basis for "smart contracts", enabling full automation of business transaction processes.

The KfW paper, which has a five-day term, settled without the need for a paying agent or clearing system, allowing immediate posting compared to a standard two-day settlement period. KfW is a German government-owned development bank.

Digitalisation will have a significant impact on the manner in which financial markets transactions will be traded and settled in the future, according to Frank Czichowski, treasurer of KfW.

"Blockchain technology holds significant potential," said Czichowski in a statement. "With this pilot transaction, we have been able to gather initial positive experience in practice. Looking forward, we anticipate benefits in terms of settlement speeds, transparency and high security standards."

Immediate securities settlement poses many benefits for money market instruments, particularly given their short maturities and simple structures. Same-day settlement reduces risk and can provide capital relief, while the reduction in the number of intermediaries can further increase efficiency.

"Transforming securities transactions into digital issues may open up enormous potential for efficiency gains," said Roman Schmidt, Commerzbank's divisional board member for corporate finance.

Given the high volumes of money market instruments traded, capital and liquidity savings can be significant, though further technical, regulatory and legal adjustments are required to realise those gains.

Frank Wellhoefer, MD for investment controlling, back office and IT at MEAG, said the project allowed the firm to analyse the impact of blockchain technology on front-office and back-office processes as well as regulatory aspects from an investor's perspective.

"The future belongs to digital business processes," Wellhoefer said in a statement. "Whilst potential efficiency gains and cost benefits are already highly attractive when looking at existing processes, opportunities to further develop our processes promise additional revenues for our clients."

Blockchain technology also sees individual steps of the transaction made transparent through real-time visualisation, providing a basis for regulatory reporting.

The pilot transaction represents an extension of a blockchain prototype platform developed by Commerzbank in conjunction with other banks. Commerzbank is part of the R3 Corda consortium that explores the application of blockchain across the financial services sector.

Others have also been testing the technology in recent months. In July, Daimler used blockchain to issue a 100m bond in partnership with four savings banks, including Landsbank Baden-Wuettemberg. The entire transaction from origination, distribution, allocation and execution to confirmation of repayment and interest payments was carried out by Blockchain.

In 2015, US-based Overstock.com issued the world's first cryptobonds through capital markets-focused DLT platform, T0. The private issue was sold to a small group of qualified buyers raising US$25m.

Cryptocurrency exchange BlockEx is planning to issue the first public bonds through a blockchain platform, while Swiss exchange group SIX has developed a digital bond issuance prototype in conjunction with Digital Asset Holdings, but has no immediate launch plans.

(Reporting by Helen Bartholomew)