Settlement Coin USC is related to the bank’s own interests

Rage Comment : Financial institutions, especially banks, have always been wary of blockchain and digital currencies, fearing that they will be replaced by them. However, no matter how powerful the technology is, it is also to improve the business efficiency and service quality of the institution. Just like the initial implementation of T+2 settlement, it was met with many obstacles and doubts. However, it is clear that the facts have proved that technology will only serve banks, so the USC settlement token jointly issued by UBS, Deutsche Bank, Santander Bank and Bank of New York Mellon is also the case, which is just to maximize the benefits of technology to banks.

Translation: Annie_Xu

Why would anyone want to use currency issued by the four largest banks that received a government bailout in 2008?

Many people were asking the same question last week when UBS, Deutsche Bank, Santander, BNY Mellon and ICAP announced a new digital currency with blockchain company Clearmatics. The consortium released a joint press release stating that the “Utility Settlement Coin” (USC token) can be used to clear and settle financial market transactions on the blockchain.

Although using a private currency issued and supported by the alliance is an alternative method of settlement, this is not the purpose of the alliance.

Robert Sams

Clearmatics CEO Robert Sams said in the joint press release:

“Cash is present in nearly every transaction, so this project is an opportunity for the industry to benefit from distributed automation of clearing, settlement and collateral management.”

Let me analyze this paragraph. The alliance hopes to speed up the central bank settlement process, reduce the need for banks to keep expensive collateral, and meet the demand for short-term liquidity of real-world currencies; thus, banks can increase the frequency of transactions and make better use of capital.

In this way, banks do not need to wait for the central bank to issue physical currency using the RTGS system, but can directly and conveniently use USC tokens to fulfill their obligations and execute transactions.

Of course, as Hyman Minsky said, "Anyone can create money, the problem is that others have to accept it."

Not that ambitious

Why would other market participants accept tokens that appear as if by magic to settle physical currency? Of course they won’t accept it unless it is issued and backed by the central bank.

The alliance therefore claims that the token will become a central bank currency.

Hyder Jaffrey, head of strategic investments and head of internet finance innovation at UBS Investment Bank, said:

"Digital currency is a core element of the future blockchain-based financial market architecture. Wall Street is currently exploring several digital currency models. USC is committed to providing a new template for central bank digital currency."

The question is which central bank is in this sentence? Does this mean that an international digital settlement alliance needs to be established to issue international settlement digital currencies independent of any country to replace the US dollar and undermine the ambitions of the IMF (International Monetary Fund) SDR (Special Drawing Rights, paper gold)? Will USC become Keynes' bancor currency and realize the dream it failed to complete?

Although this new type of international settlement currency derived from a private chain owned by a large banking alliance gives us something to think about, in this way, UBS, Deutsche Bank, Santander and Bank of New York Mellon will become the world's central banks.

The problem is that the project isn't that ambitious.

The United News reported:

"USC represents a series of cash assets, which is a version of mainstream currencies (US dollars, euros, etc.). It is exchangeable at par with bank deposits of the corresponding currency, is backed by the central bank's cash assets, and has the same purchasing power as physical currency."

Therefore, there is not only one version of USC, but many. Each physical currency corresponds to one USC and can be exchanged for equivalent value.

Banks will deposit physical currency at the central bank and issue USC tokens of equal value.

At that time, we can say goodbye to bank reserves and replace them with USC.

Barriers to implementation

But this is just replacing one electronic reserve asset with another. So what’s the point? This is where blockchain comes in.

Bank reserves on permissioned blockchains cannot be used for settlements and must go through the central bank's RTGS system. In contrast, USC is designed to enable this function and is managed by the consortium. This is a private settlement system for physical currency backed by the central bank.

But what does this design mean for banks? What benefits does it provide that the central bank's RTGS system cannot?

The first advantage is speed. The central bank's RTGS system uses double-entry bookkeeping, and settlement is instant. The speed of the blockchain verification protocol cannot match the RTGS system, and its inflows and outflows have corresponding accounts. But after all, the RTGS system is only the core step of the settlement process that takes many days.

In the days when manual operations were dominant, delays were common and are still affecting us today; and banks and brokers can profit from the money waiting to be settled. Now the settlement process no longer requires a bunch of staff, and the current negative interest rates mean that settlement delays only increase costs. So it makes sense that they want to improve efficiency.

However, getting the entire industry to unify settlement on the same day is like pulling teeth, which is very difficult (just like it took many years to achieve T+2). Now the bank members of the alliance want to take the initiative, and blockchain gives them an excuse to bypass the existing inefficient process.

Of course, banks have other reasons for change. Reserves and collateral are low-return assets that fill up the entire bank balance sheet. Banks want to find a way to solve this problem without having to provide collateral to the central bank. In fact, their ideal way is not to use the central bank's funds.

Therefore, although USC can obtain central bank support, once the majority of banks agree to accept USC tokens, they only need to stop using central bank currency.

Matt Irvine

As Matt Irvine of Bloomberg puts it:

"But for many reasons, the pseudo-dollars are the same as the U.S. dollar, such as increasing transactions with other banks. If every bank provides support, they can buy securities with the pseudo-dollars without having to deal with the troublesome FBI."

Unless something is wrong, the FBI must be called in.

After all, these are central bank currencies, aren’t they? By then, the amount of these digital currencies will far outweigh the cash assets that provide value support. This is also the process of the formation of the fractional bank reserve system.

So this isn’t really a story about cool blockchain technology replacing traditional central bank processes, but a story about banks circumventing capital and liquidity regulations in order to prevent a 2008-style depression from happening again.