Swiss bank develops virtual currency using technology behind Bitcoin

Beijing time, September 8 morning news, Swiss Bank (UBS) is developing a prototype virtual currency, hoping to provide it to banks and financial institutions for use, making it the settlement basis for mainstream financial market transactions.

But unlike Bitcoin, what the Swiss bank is proposing is a “utility settlement coin” that hopes to combine real money with central bank accounts.

The virtual currency will use blockchain technology to facilitate transactions on institutional financial platforms, similar to the technology used by bitcoin.

For example, a Swiss bank might use an autonomous blockchain-based platform to issue bonds, while another bank might have a blockchain-based stock trading platform, but both platforms would use the same utility settlement coin.

Distributed ledgers such as blockchain can verify asset ownership through a network of computers on the Internet without the need for a central authority. The digital ledger was originally used for Bitcoin, a virtual currency associated with money laundering and online drug markets, but has also been increasingly adopted by legitimate companies and new financial services startups around the world. In the past 18 months, many mainstream financial institutions have seen blockchain as a breakthrough method for trading and settling real financial instruments such as stocks and bonds.

The digital currency was developed by UBS in conjunction with London-based Clearmatics, a startup that has designed blockchain-based software that can clear and settle financial transactions.

UBS executives said the company is not planning to issue its own digital currency, but instead hopes to work with other market participants, including asset managers, regulators, clearing houses and exchanges, to create industry-level products.

UBS's director of e-commerce, Hyder Jaffrey, said the bank had already been in contact with potential partners, but he did not name the specific institutions.

Swiss banks and other financial institutions believe that once blockchain technology becomes widely popular, it will help financial institutions settle transactions in seconds, rather than waiting two or three days as it does now. This will reduce risks, reduce transaction costs and improve transaction efficiency.

Oliver Wyman estimates that the global cost of clearing, settling and managing post-trade processes is between $65 billion and $80 billion per year. In a joint study with the venture capital arm of Spain's Santander Bank, the firm estimated that blockchain technology could reduce banks' infrastructure costs for cross-border payments, securities trading and regulatory compliance by up to $20 billion by 2022.

But not everyone agrees with the Swiss bank's thinking.

First, banks are unlikely to adopt the open-source bitcoin blockchain development platform, and will most likely develop their own blockchain using special licenses issued to members.

Toby Coppel, co-founder and partner at Mosaic Ventures, a London-based venture capital firm that has invested in the bitcoin industry, said the bitcoin blockchain is still the most widely recognized distributed ledger system. “The question now is how cryptographically strong the new private blockchains are,” he said.

Jon Matonis, founding chairman of the Bitcoin Foundation, said the Swiss bank's project may not be able to achieve the expected cost-effectiveness. "It may end up being very similar to the current centralized payment network and will not achieve the network effect of Bitcoin," he said.

Alex Batlin, head of the UBS London-based cryptocurrency lab, and Oliver Bussmann, UBS CIO, said the currency would be the first step in popularizing blockchain-based platforms in mainstream financial markets.

Other financial institutions are also exploring the use of Bitcoin in the mainstream financial industry, including Nasdaq, Spain's Santander Bank and Deutsche Bank.