By ANNA IRRERA
Swiss bank UBS is working on a prototype virtual currency that it hopes will be used by banks and financial institutions as a basis to settle mainstream financial markets transactions.
But unlike the bitcoin digital currency, the Swiss bank’s proposed “utility settlement coin,” would be linked to real-world currencies and central bank accounts.
The virtual coin would be used to power transactions on institutional financial platforms built on blockchain technology, similar to the distributed, peer-reviewed online ledger which currently powers bitcoin.
For instance, UBS might have its own blockchain-based platform to issue bonds, and another bank might have a blockchain-based stock trading platform, but both would use the same utility coin for settlement.
Distributed ledgers such as the blockchain enable ownership of assets to be verified by a network of computers on the Internet rather than a centralized authority. The first use of digital ledgers was to create bitcoin, the virtual currency linked to money-laundering and online drugs markets, but also increasingly to a growing number of legitimate businesses and new financial services startups around the world. Over the past 18 months, the blockchain has been increasingly eyed by mainstream financial institutions as a breakthrough way of trading and settling real-world financial instruments such as stocks and bonds.
The digital coin is being developed in collaboration with London-based Clearmatics, a startup which develops blockchain-based software to enable clearing and settlement of financial transactions.
UBS executives said the bank does not plan on issuing the digital coin itself but hopes to work with other market participants – including asset managers, regulators and market structure providers like clearing houses and exchanges – for an industry-wide product.
Hyder Jaffrey, the bank’s e-commerce commercial director, said UBS had already reached out to potential partners, but would not comment on specific institutions.
UBS and other financial institutions have come to believe that should blockchain technology be widely adopted, it could enable financial institutions to settle trades in seconds rather than two or three days, the current time it takes. This could lead to reduced risk, lower operational costs and increased efficiency in transactions between financial services groups, finance industry experts believe.
Clearing, settling and managing post-trade processes costs between $65 billion and $80 billion a year globally, according to consultancy Oliver Wyman. In a joint study with the venture arm of Spanish bank Santander, the consultancy estimated that blockchain technology could reduce the bank’s infrastructure costs in cross-border payments, securities trading and regulatory compliance by as much as $20 billion a year by 2022.
But not everyone is convinced the UBS idea will work.
For one, banks are unlikely to build platforms on the original, open-source bitcoin blockchain, but most likely create their own blockchains with special permissions for members.
Toby Coppel, a co-founder and partner at Mosaic Ventures, a London-based venture capital firm that invests in blockchain companies, said the bitcoin blockchain remains the most “proven” distributed ledger system.
“There are question marks around the strength of the cryptography to come out of new private blockchains,” he said.
Jon Matonis, a founding director of the Bitcoin Foundation, said the UBS project might not realize the cost benefits that banks are hoping for. “It could end up being very similar to centralized payments networks we have right now, without the benefit of the network effect of bitcoin.”
The UBS initiative, still in its concept stage, is being led by the bank’s new London-based cryptocurrency research lab.
Alex Batlin, who heads the lab, and Oliver Bussmann, the bank’s chief information officer, said the coin could be the first building block in the widespread adoption of blockchain-based platforms in mainstream financial market.
Other financial institutions, including exchange groups Nasdaq and CME Group, Spanish bank Santander and Deutsche Bank are also exploring blockchain uses in mainstream finance.