The blockchain — the underlying technology that powers the digital currency bitcoin — may be nearing its mainstream moment in the sun as four of the world’s largest banks are using it to develop a new form of digital currency. That bank-backed “bitcoin” is intended to become a financial industry standard for making it easier and faster to move money around the world.
Behind the push are UBS, Deutsche Bank, Santander and BNY Mellon, with some support from the broker ICAP. According to Financial Times reports, the consortium is working to jointly pitch the premise to central banks with an eye toward a 2018 launch.
“Today trading between banks and institutions is difficult, time-consuming and costly, which is why we all have big back offices,” said Julio Faura, head of R&D and innovation at Santander. “This is about streamlining it and making it more efficient.”
Though banks had been concerned about using the blockchain’s central ledgerless system of tracking the movement of funds through the algorithms that control the mining of bitcoin, there has been increased interest in the last 18 months among major FIs looking to see if security concerns can be sufficiently answered such that back-office settlement systems and cross-border currency exchanges can be speeded up.
The total cost to the finance industry of clearing and settling trades is estimated at $65 billion -$80 billion a year, according to a report last year by Oliver Wyman.
The back-backed digital currency is not the only digital cash system competing in the market — London-based Setl is working in a similar direction, Citigroup is working on its own Citicoin, Goldman Sachs has filed a patent for SETLcoin and JPMorgan is working on an as yet unspecified but similar product.
“You need a form of digital cash on the distributed ledger in order to get maximum benefit from these technologies,” said Hyder Jaffrey, head of fintech innovation at UBS. “What that allows us to do is to take away the time these processes take, such as waiting for payment to arrive. That frees up capital trapped during the process.”
The main challenge now will be persuading central banks that have up until now treated digital currencies like bitcoin with a fair amount of caution and skepticism. Bitcoin — the technology most centrally associated with the blockchain — has a long and glorious history of its exchanges being hacked (and millions of user dollars going up in smoke), and even perfectly functioning bitcoin does have the not unimportant disadvantage of being the preferred payment type for the world’s cybercriminals.
Hyder Jaffrey notes that his project team will divide its efforts between seeking central bank operation and planning for a “low risk” commercial launch in 2018.
According to Accenture’s head of capital markets blockchain practice David Treat, the tech is still likely three to five years away from wide scale adoption. He noted mainstream acceptance is likely even further away.