Four
of the world’s biggest banks have teamed up to develop a new form of digital
cash that they believe will become an industry standard to clear and settle
financial trades over blockchain, the technology underpinning bitcoin.
UBS,
the Swiss bank, pioneered the “utility settlement coin” and has now joined
forces with Deutsche Bank, Santander and BNY Mellon —
as well as the broker ICAP — to pitch the idea to central banks,
aiming for its first commercial launch by early 2018.
The
move, to be announced on Wednesday, is one of the most concrete examples of
banks co-operating on a specific blockchain technology to harness the power of
decentralised computer networks and improve the efficiency of financial market
plumbing.
“Today
trading between banks and institutions is difficult, time-consuming and costly,
which is why we all have big back offices,” said Julio Faura, head of R&D
and innovation at Santander. “This is about streamlining it and making it more
efficient.”
Blockchain technology is a complex set of algorithms that
allows so-called cryptocurrencies — including bitcoin — to be traded and verified
electronically over a network of computers without a central ledger.
Having
initially been sceptical about it because of worries over fraud, banks are now
exploring how they can exploit the technology to speed up back-office
settlement systems and free billions in capital tied up supporting trades on
global markets.
The
total cost to the finance industry of clearing and settling trades is estimated
at $65bn-$80bn a year, according to a report last year by Oliver Wyman.
There
are several rival digital cash systems being developed. Setl, a London-based group founded by hedge fund investors and
trading executives last year, also aims to settle financial market payments
with digital cash linked directly to central banks. Citigroup is working on its
own “Citicoin” solution, while Goldman Sachs has filed a patent for a
“SETLcoin” to allow trades to be settled near-instantaneously. JPMorgan is also
working on a similar project.
“You need a form of
digital cash on the distributed ledger in order to get maximum benefit from
these technologies,” said Hyder Jaffrey, head of fintech innovation at UBS.
“What that allows us to do is to take away the time these processes take, such
as waiting for payment to arrive. That frees up capital trapped during the
process.”
He said the project team
would spend the next year seeking the approval and co-operation of regulators
and central banks and aim for a “limited and low-risk” commercial launch by
early 2018. The consortium members plan to argue that the system would improve
transparency for regulators.
The US Federal Reserve,
the Bank of England and the Bank of Canada are among central banks examining
the potential benefits of digital currencies. But concerns include the
security and the impact on banking stability.
David Treat, head of
Accenture’s capital markets blockchain practice, said the technology was still
at a stage of having “three to five years before we get things adopted at scale
and several more years before it goes mainstream”.
Credits :-http://www.ft.com/cms/s/0/1a962c16-6952-11e6-ae5b-a7cc5dd5a28c.html#axzz4IEAGvq27
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