Deutsche Bank, Santander, ICAP, BNY Mellon, UBS, and Clearmatics recently announced plans to test UBS’ Utility Settlement Coin (USC) in a real-world market environment.
UBS is the largest Swiss bank by assets, reporting CHF 942,819 million in assets at the end of 2015. The bank also opened its own innovation lab that year, at Europe’s largest technology accelerator and incubator, Level39, in London’s Canary Wharf. The lab explores “potential applications for Blockchain and other disruptive digital technologies in financial services,” according to the company’s annual report. In May, the bank released a white paper on how the blockchain could transform finance and the world.
“We at UBS believe the blockchain is a potentially transformative technology that will leave as deep a mark on our world over the next twenty years as the Internet has over the last twenty. For this reason we have been very active not only in understanding it, but in collaborating with the wider community in helping to shape a blockchain enabled future financial industry.”
— – Axel Lehmann, UBS Group Chief Operating Officer
The Swiss megabank’s USC is an asset-backed digital cash instrument implemented on a private blockchain “aimed at facilitating payment and settlement for institutional financial markets,” according to the announcement.
“USC is a series of cash assets, with a version for each of the major currencies (USD, EUR, GBP, CHF, etc.) and USC is convertible at parity with a bank deposit in the corresponding currency,” states the bank. “USC is fully backed by cash assets held at a central bank. Spending a USC will be spending its paired real-world currency.”
UBS first announced the project, in a joint effort with blockchain startup Clearmatics, in September 2015. USC is part of the bank’s blockchain initiative, dubbed the “UBS Crypto 2.0 Pathfinder Program.” According to the recent release, that first exploratory phase is now finished, was successful, and has paved the way for the partnerships with BNY Mellon, Deutsche Bank, ICAP, and Santander.
The group will now further develop the USC concept, through a series of short iterative phases and platform deployments, prior to a full release. Each phase will attempt to increase the number of market participants, broaden engagement, connectivity and network effect.
Clearmatics will be in charge of delivering the development iterations. From there, dialogue with regulators and central banks will help the consortium mold USC into an asset transfer system that has an efficient and robust structure, and more importantly, one which is compliant.
"Digital cash is a core component of a future financial market fabric based on blockchain technologies […] The Utility Settlement Coin is focussed on facilitating a new model for digital central bank cash."
— – Hyder Jaffrey, UBS Investment Bank Head of Strategic Investment & FinTech Innovation
Founded in February 2015, Clearmatics was approached to work on USC last year. The company’s core product is a blockchain platform bringing custodians and end-users together for financial OTC markets.
“Members can settle securities trades and automate the performance of derivatives and other financial contracts using our Decentralised Clearing Network (DCN) technology,” states the company’s website.
The startup raised capital last November, with Route 66 Ventures LLC, Tellurian Capital Management LLP and Nyca Partners among the investors.
"Cash is a leg to almost every trade, so this project is key to unlocking the benefits that the industry can gain from distributed automation technology in clearing, settlement and collateral management.”
— – Robert Sams, Clearmatics Technologies LTD Founder and CEO
Deutsche Bank AG is Germany’s largest bank, and the seventh largest bank in the world, according to Accuity. The bank has been independently exploring the use of blockchain in areas such as clearing of derivatives contracts, know-your-customer (KYC) and anti-money laundering registries, surveillance, as well as securities asset servicing.
"As today’s settlement and clearing is a process involving many institutions, it’s vital that we collaborate with our peers to develop viable alternatives to current models, creating new digital capabilities for the financial services industry," states Paul Maley, Deutsche Bank Institutional Client Group Managing Director.
Banco Santander is the largest bank in Spain and the largest bank in the euro zone by market capitalization. The bank had EUR 1.52 trillion in managed funds, 12,500 branches and 190,000 employees at the close of June 2016.
Santander UK plc, a wholly owned subsidiary of the Spanish Santander Group, became the first bank to use a distributed ledger for overseas payments in May. It used an app provided by non-blockchain, distributed ledger provider Ripple; a company which Santander Innoventures has also invested in.
"Recent discussion of digital currencies by central banks and regulators has confirmed their potential significance. The USC is an essential step towards a future financial market on distributed ledger technologies."
— – Julio Faura, Santander Head of R&D
BNY Mellon is the corporate brand of the Bank of New York Mellon Corporation, and has a presence in 35 countries and more than 100 markets. As of June 30, 2016, BNY Mellon had $29.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management.
BNY Mellon has also been "conducting a significant amount of research into blockchain,” in the past year. The company believes that to advance their research, “collaboration with other institutions is critical.”
“The USC initiative provides an exciting opportunity to work closely with other industry thought leaders and the regulatory community to explore the possibilities of this technology,” states Saket Sharma, BNY Mellon Head of Treasury Services Technology.
The Lead of UBS’ Crypto 2.0 Pathfinder Program and the head of UBS FinTech Innovation Lab at Level 39, Alex Butlin, reportedly announced that he was leaving UBS in October to join BNY Mellon after spending more than a decade at UBS.
Also joining UBS is the leading markets operator and provider of post trade risk mitigation and information services, ICAP. The UK-based company supports innovative financial technology firms with post-trade risk management, as well as data and financial market application development through its early-stage fintech investment business, Euclid Opportunities, which was founded in March 2011.
ICAP’s Post Trade Risk and Information (PTRI) division successfully completed a proof of technology test case using blockchain technology in March. A New York-based capital market technology startup, Axoni, provided the blockchain infrastructure for the test.
“We believe digital cash will be integral to next generation market infrastructure and will deliver significant benefits to our clients."
— – Michael McFadgen, Euclid Opportunities Managing Director
Deutsche Bank, Santander, BNY Mellon, and UBS are all part of the R3 CEV consortium. R3 founder, David E Rutter, previously served as CEO of Electronic Broking at ICAP Plc. The consortium of over 60 financial institutions is also working on their own clearing and settlement solution. R3 reportedly revealed that it has filed its first patent for a smart contract platform recently.
In spite of the support, the new USC system does have its skeptics. FinTech blogger Izabella Kaminska, writing for FT Alphaville, questioned whether the proposed USC can solve the capital intensity problem of the current settlement system. "We’re not sure it does," she wrote, citing that the new “pseudo currency” settlement system “must be deemed universally accepted, by all banks everywhere not just a subset of four banks.”
The former CNBC producer further explained that a handful of banks creating and treating a pseudo-currency as a final settlement unit between themselves says nothing about whether the rest of the world will agree with them on that categorization.
“After all, the top of the money hierarchy tree isn’t determined by a ‘final settlement unit’s’ capacity to balance a bunch of arbitrary numerical inputs in ways that a computer deems appropriate (the euro achieves that job fine),” Kaminska argues. “It’s determined by a final settlement unit’s ability to create real value so as to give rise to a socio-economic system which benefits as many people as possible (something the euro currently certainly does not do).”
On the other hand, she referenced the bitcoin blockchain, citing that “Bitcoin’s proof of work mechanism may be a hugely capital intensive waste of energy, but it’s also the thing which keeps it honest and endows it with some known value set.”