Banks to develop new digital cash unit for settlement

Four of the world’s biggest banks have teamed up to develop a new form of digital cash they believe will become an industry standard to clear and settle financial trades using 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 commercial launch by early 2018.

The move is the first example of a group of leading banks coming together to co-operate 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 allow so-called crypto-currencies, including bitcoin, to be traded and verified electronically over a network of computers without a central ledger.

Initially sceptical because of worries over fraud, banks are now exploring how they can exploit the technology to speed up back-office settlement systems and free up 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 between $US65bn ($A85.5bn) and $80bn a year, according to a report last year by Oliver Wyman.Setl, a London-based group founded by hedge fund investors and trading executives, 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 nearly instantaneously. JPMorgan is also working on a similar project.

The utility settlement coin, based on a solution developed by Clearmatics Technologies, aims to let financial institutions pay for securities without waiting for traditional money transfers to be completed. They would use digital coins convertible into cash at central banks.

The coins would be stored using the blockchain allowing them to be quickly swapped for the securities being traded.

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Source: Banks to develop new digital cash unit for settlement | afr.com