Big banks back blockchain for back-office business

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While the public has yet to embrace bitcoin and other cryptocurrencies, six of the world’s largest lenders have backed a project being led by Switzerland’s UBS to create a digital utility settlement coin.

The lenders are Barclays, HSBC, Canadian Imperial Bank of Commerce, Credit Suisse, Boston-headquartered State Street, and Japan’s MUFG.

UBS has been at the forefront of distributed ledger technology, commonly called blockchain. While this is the technology underpinning bitcoin and other cryptocurrencies, the UBS utility settlement coin is being developed as an inter-institution settlement tool that makes for “huge efficiency gains in capital velocity and the reduction in settlement, counterparty, credit and market risk,” says UBS.

Archie Achuthan, a spokesperson for Barclays, told International Investment that, although late to the party – “UBS is the originator, and we are joining in Phase Three” – Barclays was a fully committed and enthusiastic supporter of the project.

Signing up these banks represents a huge step forward for the project, with UBS head of strategic investment and fintech innovation Hyder Jaffrey (pictured left) telling the Financial Times today that the bank is aiming for a “limited ‘go live’ at the back end of 2018”.

Jaffrey added that the bank has been in discussions with central banks and regulators.

Banks now appear to be buying into the ways in which the technology brings a raft of benefits in terms of speeding up back-office settlement.

Lee Braine, at Barclays chief technology office, describes distributed ledger as “one of the most innovative technologies out there”.

Among the benefits that the bank sees, he adds, are reducing risk and improving efficiency in capital markets.

The way that the utility settlement coin will work is that it will allow institutions to buy and sell securities and assets, including bonds and transfer, from and to one another without having to wait for funds to clear as with traditional transfers.

The coins will be directly convertible by central banks, meaning little resource required for post-trade settlement. Coins will be stored using blockchain technology.

These latest six banks will be joining Deutsche Bank, BNY Mellon, NEX and Banco Santander in embracing the new technology.

The fact that such major players are now committed to the utility settlement coin suggests that UBS and others have been successful in allaying fears over the worries about fraud and hacking that appears to have assailed the development of bitcoin and other cryptocurrencies.

Fears in recent over the past couple of years about blockchain security mirror to some extent those cited in the Nineties with regard to internet banking, with horror stories about predicted online fraud largely proving unfounded.

Whether that embracing of the new technology, however, extends from institutional acceptance of blockchain for inter-institution settlement to wider consumer embracing of bitcoin and other cryptocurrencies remains to be seen.