The UK Financial Services Authority tests off-chain payment channels and studies cross-border settlements on blockchain

The UK Financial Services Authority (FCA) is currently testing clearing and settlement solutions using Bitcoin. The financial regulator has established a partnership with digital currency operator Epiphyte, a company dedicated to blockchain cross-border payment settlement.

FCA’s Bitcoin Blockchain Test

According to several news reports in the UK, the FCA is determined to study cross-border settlement using blockchain. Last spring, the FCA launched a sandbox accelerator and received applications from nearly 69 companies. The FCA's sandbox provides a favorable development environment for startups and traditional companies to encourage them to build financial technology solutions. Now, London startup Epiphyte will work with the FCA to use P2P protocols such as Bitcoin to provide low-cost and secure trading methods.

The FCA said that during the testing phase of the sandbox, Epiphyte plans to develop a settlement mechanism similar to SWIFT. Epiphyte said that they will deploy their platform SpecialFX in the next few weeks. The platform can bundle fiat currency and Bitcoin together to provide a basic settlement mechanism.

(Epiphyte CEO Idan Yago)

Edan Yago, CEO of Epiphyte, said:

The entire testing phase is regulated by the FCA and is authorized. (SpecialFX) is a technology platform that allows you to transfer money in any blockchain system using Bitcoin or Ethereum. Our platform is compatible with all blockchain systems.

Traditional settlement methods may be eliminated

Yago said that the FCA has appointed a project leader to better guide the work. Epiphyte has worked with many traditional institutions, including BBVA and Visa.

The form and content of our cooperation with Visa is no different from that with other banks, except that only BBVA has published its research results so far.

Epiphyte’s platform uses the security of blockchain technology for real-time transaction settlement. Yago added that the FCA’s sandbox mechanism also brings them a lot of partnership opportunities. First, their platform will serve remittance and foreign exchange companies, laying the foundation for their eventual release of retail and enterprise-level solutions.

Yago believes that their platform is expected to become a strong competitor to SWIFT and the Single Euro Payments Area (SEPA). Their settlement process is completed on the blockchain and the transaction speed is very fast. However, companies using SWIFT usually have to wait for several days and even be charged a lot of unnecessary fees. Yago said that because the traditional settlement mechanism takes too long, the process is not transparent to regulators and there are certain management difficulties.

There is a lot of uncertainty (in traditional settlement mechanisms), and the process is not transparent, so once the transaction is sent, you have no idea where your funds are going. From a regulatory perspective, the process is not real-time, so it is difficult for regulators and law enforcement to review the activities of these systems.

In addition, once a situation occurs, the regulatory authorities must obtain information from multiple parties or intermediaries involved in the transaction in order to understand the specific details.

Believe in the potential of blockchain

Chris Woolard, head of strategy at the FCA, said the FCA firmly believes that blockchain has unlimited potential.

The focus of this collaboration between Epiphyte and the FCA is on Bitcoin off-chain transaction models. Eventually, they will launch a payment channel similar to the Lightning network to ensure network scalability and speed. Yago explained:

Transactions can still be recorded on the blockchain; this new system is similar to the Lightning Network, so it has the same level of security as the blockchain network, while also achieving higher levels of scalability and privacy.

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