Four of the world’s major international banks are set to develop their own custom version of digital currency. The aim is to cut down on the time and costs currently associated with clearing and settlement in financial markets. This announcement is the latest in a recent string of similar realisations by financial institutions, for whom the power of harnessing blockchain technology is finally starting to dawn.
Blockchain equals Cost-Effectiveness
Banks are struggling with low returns, making cost effectiveness more important than ever. In addition to providing savings, they now see that blockchain offers a chance to build more efficient systems. Savings made by this new implementation would likely free up capital traditionally held against trading risk, thus improving liquidity. UBS, Santander, Deutsche Bank and BNY Mellon are the four major forces behind the development. The banks are currently working with UK firms ICAP and Clearmatics Technologies to create the new blockchain based system.
The above banking institutions claim that outdated systems have held them bank from operating together in a cohesive manner. Large back offices were initially created to overcome the problem. However, all that this accomplished were huge streams of paperwork for long-suffering employees to organise. By using blockchain, funds can be transferred between the banks and a truer record of transactions generated. Transactions will be stored on the blockchain, creating far less paperwork whilst still providing a solid record of the transaction. This will then be reflected in the relevant fiat account.
Creating a Cryptocurrency
Whilst many outlets have reported that the banks mentioned above will be creating a new cryptocurrency for wider use, this is not strictly true. What they are really doing, is creating coins using blockchain technology which will be directly convertible into existing currencies in order to be deposited for use at central banks. They wish to, in theory, put dollars, euros and pounds on the blockchain. It will be used solely as a ‘utility settlement coin’. The currency will be traded between the banks to pay for securities without the traditional delay associated with money transfers.
The Distributed Ledger
The Head of fintech innovation at UBS made a statement where he talked about the current struggles that banks, exchanges and clearing houses have in maintaining a clear record of transactions. The distributed ledger would provide all of these institutions with a shared, true copy of the required data. The system will provide savings in areas of payments, securities trading and compliance. In a recent report by Santander, Oliver Wyman and Anthems, it is stated that savings of up to $20bn a year by 2022 could be generated by the system’s implementation.
Although the theory behind creating a distributed ledger is solid, the banks must now work to generate support from central banks. Should they receive the backing necessary, they hope to have the ledger up and running by 2018.
A further challenge will be creating a blockchain which can handle the huge number of transactions required, at a high speed. At present, Visa is capable of handling around 24K every second.
Whilst we have all been well-aware of the benefits of digital currency, it is only now that central financial institution have begun seeing its full potential. An official announcement is expected to be delivered soon with further details.