It was only a matter of time until the financial sector started creating their own virtual currency. Four of the world’s largest banks are creating their own utility settlement coin, which will run on distributed ledger technology. This project is backed by UBS, BNY Mellon, Deutsche Bank, and Santander. A commercial launch of this new virtual currency is tentatively scheduled for early 2018.
Utility Settlement Coin on Distributed Ledgers
Blockchain technology has often been referred to as a way to speed up transaction settlements. Right now, the majority of these transactions take days, if not weeks, to complete. The reason is quite simple: every transaction passes through many different financial institutions. But with the new developments in technology, a far better ecosystem can be created.
This news is also surprising in a way. Most major banks opposed Bitcoin technology for several years, as there were concerns over fraud and money laundering. But over time, banks have begun exploring this technology for their own benefit. Albeit they will not use an open standard, such as Bitcoin, their private blockchain solutions can get the job done as well.
UBS Investment Bank’s Hyder Jaffrey told the media:
“Digital cash is a core component of a future financial market fabric based on blockchain technologies. There are several digital cash models being explored across the Street. The Utility Settlement Coin is focussed on facilitating a new model for digital central bank cash.”
What this new concept will do is let financial institutions pay for securities without having to wait for money transfers to complete. Digital coins can be sent across the blockchain in real-time, and they can be converted into cash through central banks.
In doing so, the entire process would be sped up, and the cost of post-trade settlement and clearing is reduced to near zero. These digital coins would be stored on a blockchain, allowing them to be swapped for financial securities on the fly.
Clearing and settling trades is a US$75 billion business year over year. If even a fraction of these costs can be cut, it will free up more money to focus on other projects in the financial sector.With such a large focus on innovation right now, every cost-cutting measure should be considered by banks.
Distributed ledger technology is a perfect fit for this utility settlement coin, due to near real-time transactions. This project is a very “real” example of banks working on blockchain technology, and it shows how institutions can improve their own services and products. Although this initiative is only backed by four major banks, for now, it is not impossible we will see future additions. This process will take place throughout several development stages.
Fierce Competition Lies Ahead
At the same time, this new utility settlement coin will face some stiff competition. London-based Setl is working on linking digital cash to central banks. There is also Citicoin, created by Citigroup, which is still in the proof-of-concept stage. Goldman Sachs, on the other hand, is working on their SETLcoin patent filing, which is doing the same as this utility settlement coin. JPMorgan is working on a very similar solution, albeit there is no specific name for it yet.
But there are other hurdles to take into consideration as well. The utility settlement coin project still needs to gain approval from central banks and regulators around the world. Moreover, as more details regarding this concept become available, other financial institutions may decide to create their own versions.