Global banks step closer to creating new digital settlement currency
by Bija Knowles
Can a digital currency solve settlement and clearing inefficiencies for global banks? Banks including Barclays, Credit Suisse and HSBC hope to launch the new coin by end of 2018.
Yesterday the Financial Times reported that six global banks – Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street – are collaborating to work on a new form of digital cash for clearing and settling financial inter-bank transactions over blockchain.
What is the utility settlement coin?
The digital currency – known as the utility settlement coin – was first created by UBS and Clearmatics Technology in 2015 to increase efficiency in financial markets. The digital coins are stored on distributed ledger technology (blockchain) and can be converted into different currencies. The currency speeds up back-office settlement processes for banks, helping them to buy securities, such as bonds or equities, without having to wait for traditional payments to be settled. Instead, the digital coin is designed to be converted directly into cash at central banks, helping banks make savings in cost and time in the post-trade settlement and clearing process.
Hyder Jaffrey, one of the leaders of the project at UBS, told the FT that he expects the utility settlement coin to be used for banks to pay each other in different currencies from the end of 2018. He told the newspaper: “following legal, regulatory and accounting viewpoints, we now feel we have a structure that gives us a basis to move on to phase three with a workable structure for achieving settlement finality.”
Some of the unresolved questions about the utility settlement coin include:
- How will it be valued?
- Will central banks endorse it?
- Can the blockchain technology handle the volume necessary for inter-bank transactions?
Is digital currency the new gold?
And in another sign of the digital times, bitcoin almost doubled in value in the past month, increasing from US$2,735 on 1 August to a high of US$4,810 today. This article in FX-MM, written by EasyMarkets' James Trescothick, asks whether bitcoin could be the new safe haven for investors, drawing a comparison between bitcoin's meteoric appreciation and the “rush to gold” seen in times of trouble and investor nervousness. Trescothick suggests that the recent escalation of tensions between North Korea and the US are behind the (modest) rise in the price of gold in the past month – and perhaps global investor anxiety could also account for the rising value of bitcoin? It's an interesting idea although investors might be hesitant about buying a digital currency that has many signs of being in the midst of a bubble and is so young most investors have underpants that are considerably older than bitcoin!
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