UBS is unlikely to declare itself the real Satoshi Nakamoto anytime soon, but its own bitcoin-like digital currency could give it a head start on other distributed database aficionados in investment banking. The Swiss bank on August 24 said four financial firms, BNY Mellon, Deutsche Bank, ICAP and Santander, had joined its attempt to develop a so-called "Utility Settlement Coin" (USC). In contrast to the libertarian cryptocurrency, its adoption depends resolutely on the approval of a central authority.
The initiative shares the purported benefits of other bank-backed blockchain projects. To recap: shared database technology provides an indelible store of record, maintained and updated by a network of computers instead of having to be vetted by human eyes. In banking terms, it promises to simplify the lengthy and cumbersome process whereby institutions tally their various trade and settlement records. If settlement times were to fall - from a day or more currently to as little as six hours, as one of USC's backers suggests they might - clients would receive a more efficient service. Lenders might also have to hold less capital as a result of being less exposed to the risk that counterparties pull out of trades or fail to stump up hard cash.
The catch for banks is the wholesale financial institutions that are their clients. They have blanched at being forced to transact in unregulated cryptocurrencies associated with hacking thefts and nefarious trades in goods and services over the dark web. The UBS consortium's proposal is that its digital coins should be backed by central-bank assets, meaning that if something goes wrong, clients would be made whole. That should give nervy clients certainty in a way that using a bank's own balance sheet as the ultimate guarantor probably wouldn't.
The reliance on central bank approval could be a headache, however. No regulator has yet had the gumption to back its technology. The guardians of monetary policy may prefer to get comfy with issuing their own digital currency first before nodding others through.
There are several other problems that blockchain technology must overcome to convince sceptics. These include the trade-off between achieving scale and computing efficiency, as well as limits on transaction volumes. At least UBS has now come up with a digital currency that financial institutions can relate to. The snag is it needs central banks to play along.
The initiative shares the purported benefits of other bank-backed blockchain projects. To recap: shared database technology provides an indelible store of record, maintained and updated by a network of computers instead of having to be vetted by human eyes. In banking terms, it promises to simplify the lengthy and cumbersome process whereby institutions tally their various trade and settlement records. If settlement times were to fall - from a day or more currently to as little as six hours, as one of USC's backers suggests they might - clients would receive a more efficient service. Lenders might also have to hold less capital as a result of being less exposed to the risk that counterparties pull out of trades or fail to stump up hard cash.
The catch for banks is the wholesale financial institutions that are their clients. They have blanched at being forced to transact in unregulated cryptocurrencies associated with hacking thefts and nefarious trades in goods and services over the dark web. The UBS consortium's proposal is that its digital coins should be backed by central-bank assets, meaning that if something goes wrong, clients would be made whole. That should give nervy clients certainty in a way that using a bank's own balance sheet as the ultimate guarantor probably wouldn't.
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There are several other problems that blockchain technology must overcome to convince sceptics. These include the trade-off between achieving scale and computing efficiency, as well as limits on transaction volumes. At least UBS has now come up with a digital currency that financial institutions can relate to. The snag is it needs central banks to play along.