Settlement Coin Creators Seek to 'Liberalize' Central Banks With Blockchain
Two resources available almost exclusively to central banks could soon be opened up to additional users as a result of a new digital currency project designed by a little-known startup and Swiss bank UBS.
One of those resources is the real-time gross settlement (RTGS) system used by central banks (it's typically reserved for high-value transactions that need to be settled instantly), and the other is central bank-issued cash.
Using the Utility Settlement Coin (USC) unveiled today, the five-member consortium that has sprung up around the project aims to help central banks open-up access to these tools to more customers. If successful, USC has the potential to create entirely new business models built on instant settling and easy cash transfers.
In interview, Robert Sams, founder of London-based Clearmatics, said his firm initially worked with UBS to build the network, and that BNY Mellon, Deutsche Bank, ICAP and Santander are only just the first of many future members.
According to Sams, the offering of tools traditionally held tightly by central banks to more people wouldn't so much be disruptive, as it would be the fulfillment of a long-standing industry demand.
"There's been conversations for years about liberalizing access to banks' RTGS systems. There's been a debate for a long time about if banks should liberalize access to central banks money. What we’re doing with USC is very much consistent with that renewed momentum."
Perhaps what caught most of the attention with the project, however, was USC's use of not just a distributed ledger, but one that would find participants trading "digital assets" or blockchain-based code.
Whereas consortium R3CEV recently filed a patent for a distributed ledger with no digital tokens, Sams said the Utility Settlement Coin (USC) is a fundamental part of the settlement process in the system it designed.
The USC is built on top of the startup's Decentralized Clearing Network, a blockchain platform originally created to help members settle instruments and automate post-trade processes for OTC markets.
Now that the service is being shopped around to central banks, the digital coin is playing an increasingly important role
"Cash is a leg to almost every trade," said Sams, who previously worked for nine years as a derivatives trader with Sanctum FI, also in London. "In order to get most of the benefits of a distributed ledger in settlement, there has to be cash on a distributed ledger rail."
How transactions might be processed, and who will own the nodes, has also not been shared. But what we do know based on a statement from the company is that Clearmatics described the USC as "a series of cash assets" for currencies, including US dollars, euros, British pounds and Swiss francs.
The digital asset is designed to be convertible at parity with a bank deposit in the corresponding currency, according to the same statement. Sams described USC as a form of digital cash that is "fully backed by cash assets at the central bank".
"It’s like a form of synthesized central bank money, which is very different than commercial bank money."
Over the coming months, the consortium plans to unveil different aspects of its effort, including further technological components of how it works.
A non-disclosure agreement prevented Sams from sharing details about who will custody the digital currency, he said.
Months after raising $1.3m from Route 66 Ventures and others, the London-based startup partnered with UBS to begin work on the project.
The digital asset and the ledger have been built from the earliest stages with participation from various central banks, according to Sams, but he wasn’t able to name which ones, or how many. However, he did add that the focus of the work has been on OECD economies.
Sams described the network as a market-wide consortium utility "that it is built to run a piece of market infrastructure".
By synthesizing central banks cash and opening up access to RTGS systems, consortium member Deutsche Bank sees potential new business models that could be created.
Deutsche Bank’s head of global transaction banking, Ed Budd, said the bank is using its status as an early member of the consortium to search for undiscovered business opportunities, not just new technological capabilities.
On the capital market side, he says his colleague, managing director of Deutsche Bank’s Institutional Client Group, Paul Maley, is interested in how the digital currency will be treated as an asset from a balance sheet perspective. Budd is more focused on the potential of "how this might lay out over the course of time medium and long term".
"Our focus is on how we can best apply technology to the businesses we operate in. The opportunity here was the use and access to a central bank digital currency, a key design principle for many of the markets that we work with."
Growing the network
Over the coming months Budd says Deutsche Bank and the other consortium members will work to identify additional business opportunities on behalf of its clients, with new members to be announced.
According to Sams, there isn’t yet a solid timeline for development, but he says he expects ongoing conversations with multiple central banks to continue.
"While there are now five entities involved in the project, the intention is that in a later phase that the consortium will include some of the major parties in the industry."
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