Thirteen of the world’s biggest banks are preparing to launch digital versions of major global currencies in 2020 after years of research convinced them that the technology underpinning cryptocurrencies could be used to make trading less risky and cheaper.
The UBS-led research on a "utility settlement coin" (USC) has been in the ether since 2015, when banks decided to investigate whether wholesale banking could be made more efficient by deploying distributed ledger technology.
The technology, which is used in blockchain networks, enables participants to instantly share information on an open-access ledger that can never be altered or erased.
It could theoretically replace reams of paperwork and processing, but banks must first confront legal and regulatory hurdles on everything from risk management to privacy before deploying it widely.
New venture
"When we started out . . . this project has basically been about R&D; we didn't know if the characteristics [we wanted to achieve] were possible," said Rhom Ram, head of Fnality, the new venture into which the banks and exchange Nasdaq have just invested £50 million (€56 million) to create a market infrastructure to transfer value digitally.
“The funding signals that it is possible,” he added. “The investors believe it is possible based on the evidence they have seen.”
Hyder Jaffrey, head of strategic investments at UBS’s investment bank, said the research showed the USC would soon be used for clearing and settling trades and could ultimately prove “transformational” for trading.
“We see a way of actually reducing the risk significantly in the post trade world,” he said, referring to the settlement, credit and counterparty risks banks take on between the time that trades are instructed and when the money and assets actually change hands.
“All of these things play into costs, operational efficiency and the balance sheet.”
Lee Braine, an executive at Barclays' chief technology office, said his bank's confidence in the project's viability had "meaningfully" increased since it joined the effort a year-and-a-half ago. Other big banks involved in the project include Santander, BNY Mellon, MUFG, Credit Suisse, KBC, ING and Canada's CIBC.
Global currencies
The USC will begin life with 14 owners and members, and will be denominated in major global currencies including the dollar, yen, euro and sterling. Every unit of a dollar-denominated USC will be backed by a traditional dollar at the Federal Reserve, and the same model will be used with other currencies, ensuring the value of the coin is stable.
Its initial applications will be in relatively niche areas, such as creating a market infrastructure that allows the coins to be used to meet margin requirements in derivatives trades. Mr Ram said while at present it took at least a day for such requirements to be satisfied, using the USC the process could become almost instantaneous.
Mr Braine said that, while the size of the founding banks meant their efforts would have “traction” from launch, the impact would not be a “big bang”. “This ultimately is a market transformation over time,” he said.
Japanese banks are also working on a digital coin – the J Coin – but they are focusing on retail banking, as is social media giant Facebook, which is developing a coin pegged to the dollar which could be used to instantly transfer value between Facebook users.
– Copyright The Financial Times Limited 2019
