UBS develops virtual currency for mainstream financial markets

In the early morning of September 5th, Beijing time, according to the Wall Street Journal, Swiss Bank is working on developing a prototype of a virtual currency, hoping that banks and financial institutions can use this currency as a means of settlement for mainstream financial market transactions in the future.

But the "settlement coin" being developed by Swiss banks is different from the digital currency bitcoin in that it will be linked to real-world money and central bank accounts.

The virtual currency will be used to support transactions on institutional financial platforms built on so-called blockchain technology, similar to the so-called distributed ledger that Bitcoin relies on to complete transactions.

For example, a Swiss bank might have its own blockchain-based platform for issuing bonds , while another bank might have a blockchain-based stock trading platform, but both platforms could use the same “common settlement coin” for settlement.

Unlike real money, the virtual currency uses a “distributed ledger” that is verified by a network of computers on the Internet rather than by a centralized authority. The first use of the distributed ledger led to the creation of Bitcoin, a virtual currency that has been linked to money laundering and online drug markets but is increasingly being used by legitimate businesses and emerging financial services startups around the world.

Over the past 18 months, blockchain technology has been increasingly viewed by mainstream financial institutions as a breakthrough trading and settlement method for real-world financial instruments such as stocks and bonds.

UBS is developing the digital currency in partnership with Clearmatics, a London-based startup that has developed blockchain-based software for clearing and settling financial transactions. UBS executives said they do not plan to issue the digital currency on their own but want to work with other market participants, such as asset managers, regulators and market structure providers such as clearing houses and exchanges, to create an industry-wide product.

UBS has been in touch with potential partners, but has not named them, said Hyder Jaffrey, the bank’s e-commerce commercial director. The bank and other financial institutions believe that if blockchain technology is widely adopted, it could allow financial institutions to settle transactions in just seconds, rather than the two or three days it takes now.

Financial industry experts believe that this settlement method can result in reduced risk, lower operating costs and improved efficiency in transactions between financial services groups.

According to data provided by consulting firm Oliver Wyman, global costs for clearing, settlement and post-trade procedures are as high as $ 65 billion to $80 billion per year. According to a joint study conducted by the company and the venture capital arm of Spain's Santander Bank, blockchain technology could reduce bank infrastructure costs in areas such as cross-border payment transactions, securities trading and regulatory compliance by up to $20 billion by 2022.

However, not everyone is convinced that the Swiss bank's idea will work.

For example, banks are unlikely to build platforms based on the original, open-source Bitcoin blockchain technology. They are most likely to create their own blockchain technology that only chartered members can use.

Toby Coppel, co-founder and partner at London-based venture capital firm Mosaic Ventures, which invests in blockchain technology companies, said the bitcoin blockchain remains the most "proven" distributed ledger system. "It's questionable whether new private blockchains can deliver strong encryption," he said.

Jon Matonis, founding director of the Bitcoin Foundation , said the Swiss bank's project may not achieve the cost benefits the bank hopes for. "In the end, this project may become very similar to the centralized payment network we have now, without the benefits of the network effect of Bitcoin," he said.

Alex Batlin, director of the UBS project, which is being run by the bank's new London-based virtual currency research lab, and Oliver Bussmann, UBS's chief information officer, said the virtual currency could be the first building block for blockchain-based platforms to be widely adopted in mainstream financial markets.

Meanwhile, other financial institutions, including exchanges such as Nasdaq and CME Group and banks such as Santander and Deutsche Bank , are exploring the use of blockchain technology in mainstream financial markets.