The FT is reporting this morning that four banks are teaming up to create a new form of digital currency based on blockchain technology: a rival to Bitcoin in other words.
I have problems with this. First, there are questions to ask about the control mechanisms in this process. I have already expressed my concerns about the Bitcoin process where the creation of currency blocks appears to give rise to an unknown beneficiary of the credit (or income) in the process. I believe this is a major potential cause of financial instability.
Second, in the case of new bank created currencies I do therefore want to know if the credit arises from loan structures or is taken to an income account, as appears to be the case in the Bitcoin blockchain, which is why its behaviour cannot be like that of conventional money.
Third, the regulatory environment for this new mechanism needs urgent attention. It is claimed it will allow greater volumes of trading by banks with lower capital requirements, but that also very obviously links to increased risk. Who is going to make sure that the risk in question is managed within the banks and has no potential spillover effect?
And last, what is the relationship between such a currency and money laundering regulation? The question needs an answer.
Banks will not be undertaking these activities without expecting a return. Too many bank returns have for too long been at cost to society at large. That possibility seems implicit in these arrangements. Some pretty firm regulation is required in that case.
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The 18th Century was the great age of counterfeiting when many men introduced alternative currencies, albeit theoretically related to the ordinary forms. It was also a great age of financial disasters, famines, collapse of kingdoms and revolutions.
You have got the wrong end of the stick. The idea of these electronic currencies is to make use of blockchain technology to cut costs in currency settlement. They won’t create a new bitcoin, they will simply be adding a blockchain component to already existing currencies.
At the moment you need small armies of human staff to verify transactions. Using blockchains simply allows a lot of that work to become electronic, cutting costs for the banks.
No, they are saying this is a new currency
Read the article
No, it really isn’t a new currency. It’s purely for faster and more secure settlement of existing currencies.
UBS joined by ICAP, Deutsche Bank, Santander, BNY Mellon
Banks are trying to speed transactions that can take days
By Noah Buhayar
(Bloomberg) —
UBS Group AG and peers on both sides of the Atlantic plan to seek regulatory approval to use a new form of digital cash to settle financial transactions, cutting costs and time.
UBS, which pioneered the “utility settlement coin,” is joining forces with Deutsche Bank AG, Banco Santander SA, ICAP Plc and Bank of New York Mellon Corp. to test the system in a “real-market” environment, the Zurich-based bank said in a statement on Wednesday. The project uses blockchain, the technology underpinning bitcoin, to let firms pay for securities without waiting to complete traditional money transfers.
“Today’s settlement and clearing is a process involving many institutions,” Paul Maley, managing director at Deutsche Bank’s Institutional Client Group, said in the statement. “It’s vital that we collaborate with our peers to develop viable alternatives to current models, creating new digital capabilities for the financial services industry.”
The idea of using digital cash on a blockchain ledger has captivated Wall Street executives because it could speed transactions and free up capital. Investment banks including Citigroup Inc. also have projects in the works, hoping to improve upon the financial industry’s existing system, which can take days to move money across town or around the world, tying up billions of dollars.
The consortium will argue the system would improve transparency for regulators. They will continue the dialogue with central banks and regulators to ensure USC is compliant with regulation. The companies plan to add more firms as the project progresses, UBS said in the statement.
“Digital cash is a core component of a future financial market fabric based on blockchain technologies,” Hyder Jaffrey, head of strategic investment and FinTech innovation at UBS’s securities unit, said in the statement. “The utility settlement coin is focused on facilitating a new model for digital central bank cash.”
Note the last sentence specifically. Digital Central Bank Cash. Utility Settlement Coin is the moniker they are giving it at the moment simply because it will encompass settlement across a range of existing currencies.
But the interesting thing is that the one thing blockchain cannot supply is instant settlement: the block has to be created
There is always a delay and always risk as a result
Instant cash settlement is available
So I do not buy this, at all
No, instant settlement is not currently available. Securities tend to settle T+2 or T+3 because the cash doesn’t settle till then – indeed “spot” FX actually settles T+2.
Getting something to settle T+0 (i.e. same day) is a major hassle and involves a lot of human effort, and even then you often get fails especially if you miss the settlement window. I speak from 15 years of personal experience.
Blockchain would allow instant settlement – as the settlement instructions and ownership details for both parties are held within the blockchain electronically. This is already done for various derivatives, albeit in a slightly different manner, but derivative settlement is held back to T+2 to allow for any cash settlement to take place.
Instant settlement is technically impossible in the blockchain: the block has to be created
“Instant settlement is technically impossible in the blockchain: the block has to be created”
Yes, it’s done electronically. And takes all of a fraction of a second.
I think it would help if you had any understanding of how settlement of FX/securities currently operates.
Simply not true: block chain is not instantaneous
You keep asserting that blockchain is not instantaneous. I’m not sure you understand what a blockchain is. It is simply a piece of code. It is generated instantaneously for a given transaction. Decoding it is also near instantaneous.
Bitcoin artificially slows down the process as node miners get paid in bitcoins – to prevent the value of a single bitcoin being inflated away to zero. This would not need to happen in a banking settlement system as the UCS corresponds to real cash, virtually settled.
It is certainly much faster, more efficient and cheaper than standard SWIFT settlement. It’s also safer (as the ledger is essentially impossible to hack) and removes settlement risk.
I get the distinct impression that you don’t really know what a blockchain ledger is, and have no understanding of current securities settlement processes.
I have spent some time with blockchain experts
And I am aware that because this proposal involves a new currency – it explicitly says so – your explanation looks like the one at fault
Might I ask who these experts are? Given you don’t seem to understand what a blockchain is, you clearly didn’t spend the time very wisely or take anything in.
The UCS is not a new currency. Specifically not. A UCS dollar is identical to any other US dollar and simply represents one in a settlement system. Unlike bitcoin, UCS does not create a new currency with it’s own exchange rate. I can’t say this enough: UCS is a settlement system for currencies, not a currency in itself. The whole point is to swap UCS dollars for “real” dollars at a rate of 1:1 at your clearing bank/central bank with greater speed than the current T+2 SWIFT settlement process. The blockchain only contains the information of who the new owner of those dollarts is and who the previous owners were with the appropriate timestamp info.
I’m trying to keep this simple, given you don’t seem too understand even the basics. But I would hope I know what I’m doing as I am currently implementing the quantum cryptography for my company’s private keys for a very similar system. The real weakness for any blockchain system being the private key and “wallet” system – bitcoin itself is essentially unhackable but stealing an individual’s “wallet” is not secure if you know the private key (or steal it, most likely). QKD doesn’t remove that flaw but by its very nature allows me to tell when someone is trying to access the private key – making it very secure.
Then why the talk of a currency?
I candidly do not believe you
“Then why the talk of a currency?”
Poorly written FT article and the system will be used to settle currencies.
“I candidly do not believe you”
What don’t you believe, why, and where are what is your counterfactual? other than nameless experts you claim to have spoken to?
Amused to note that the FT is saying this version is not creating a new currency this morning
It describes what might be called a derivative instead
Spot the difference
Even more amusingly it is reckoned blockchain can handle 7 transactions a second
That’s going to be amusing with high speed trading
Instant settlement? The queues will last forever
Dream on
Looks like the banks and government are wanting (i) further control of money and (ii) are getting afraid of the open source and not-for-profit community, such as Ethereum [1]. Bitcoin and Ethereum’s computer code is open [2]; us optimists want to build “a more globally accessible, more free and more trustworthy Internet.” Blockchain can build smart contracts, digital money etc, whose is going to stop the banks wanting a cut from all the possibilities of these new technologies.
I wonder if these banks will publish via open source code. If not how do we know it’s not stymied for the NSA and other national agencies to mess with or banks or governments to cancel money or contracts? How do we know that new types of cryptography will not be developed to undermine such systems? US presidents have a nuclear button and soon [a selective] money destroying or manufacturing button!
‘Crypto-currencies’ a new arms race, ‘let’s get in early’? This needs open participation from all sectors — academics, banks, business, finance, government and citizens. Why don’t these banks go down the open route e.g. Ethereum route? The BoE is separately deliberating; with whom?
For whose benefit is this, the article claims “the system would improve transparency for regulators.” Oh, yes — what set of regulators, more power to the Establishment!
[1] https://www.ethereum.org
[2] https://github.com/ethereum/
All good questions
2 weeks ago you told me that Bitcoin was not money. Have you changed your mind?
No
This is not money
But it is a trading mechanism
All participants are regulated, the Banks are all Globally Systemically Important Financial institutions.
Do you think we’ll be following the US down the extra-territorial tax law path? The US also have the view that digital currency is property and taxed as such, however asset growth is generally taxed through individual taxes such as capital gains and that is where the enforcement action is focused.
It leaves your questions on tax liability unanswered, but I think its the same question as the dataenkraken’s transfer pricing to ensure profit only occurs in low tax regimes.
As I understand it the blockchain requires vast amounts of computer power such that there is not enough in the world to make the blockchain utilisable by the general public. So this digital cash will be of use only to those able to make the large investment in the computer power required. This will end up as another privilege that only the banks will be able to access.
If the regulators are also able to access this then I suppose that’s where the line about easy regulation comes in. But then when the banks do something untoward they will say it is not possible because the regulators have instant and transparent access to all the transactions. The only advantage might be that there is theoretically a reversible audit trail.
I think at the very least every one of these transactions should be taxed and be unenforceable without it. This would have the effect of producing a state record of every transaction and that would need to be paid in every state relevant to the transaction. Not an unreasonable ask for another banking privilege.
Some say it is only Bitcoin that requires the IT power
But I suspect that may not be the whole story
If the “new digital currency ” is not a digital currency or cash then what is it and why use the word currency.
If the process is simply a transfer mechanism then the existing currency values will still need to be input, a faster form of BACs.
If there is a blockchain equivalency (using some form of instantaneous look up table) then surely a new currency is created.
Do not understand it; this is too important to be left to experts.
This is a new currency, I am sure
And there is an ulterior motive and it’s not just back office, which i think is prerrt poor as explanations go
I agree with you that there is an ulterior motive.
Firstly why name the different technologies as ‘coins’ when you can name it differently if its just a clearance system?
Secondly, if a ‘coin’ has to be created, then its simply these banks trying to basically create another commodity that they first can use as money and then once it has value in the eyes of a large user base, financialise it for trading.
Richard,
BC is correct in his posts.
You appear to not understand the difference between blockchains and coin-mining
R
But this is going to be about currency creation
So tell me – who does the mining?
Explain
And say why all the reports that this is a new currency are wrong
Richard,
“Richard Murphy says, August 24 2016 at 9:29 pm
So tell me — who does the mining?”
No mining takes place.
The blockchain is a secure ledger – a history of who owns the asset and who owned the asset in the past. Rather like land registry with no paper.
New technologies can be difficult to understand and I like others have misunderstood. Once I do understand, I admit my initial belief was wrong and am praised for doing so and for being honest.
R
I know what a ledger is
And blockchain
But we know it has massive problems in it, like incomplete accounting, as I have explained, which are a security nightmare (kindest interpretation)
And this is a new currency so de facto someone is responsible for regulating it: the blockchain is not going to do that in a regulated finacial environment that must be audited (all if which you ignore) and that’s the equivalent of mining
So who does it?
How?
To what standard?
Where?
A regulator will ask this
So can I, despite the abuse
And I have had no credible answers
In fact I have only had incredible ones
Even when BC explains clearly why your initially not unreasonable position is wrong, you still stubbornly stick to it.
I suspect Mcdonnell and Corbyn found you a nightmare.
But they are creating a currency
And there is clear evidence that Blockchain does not clear immediately: it’s quick, but not instant
Richard, I guess you have sent emails. Updating a blockchain is like sending a reply to an email, or updating the electoral roll online, or online banking.
Except there’s no evidence of that: it’s never worked that way
Richard – when you’re wrong, just admit it. Doing so makes you stronger.
One problem: this is a plan or a new currency
And there is no evidence blockchain has ever cleared imnmediately
Now, what did I get wrong?
Does it need to clear immediately, or just faster than the previous settlement system so that there’s a profit in doing so, apart from reducing the back office staff?
And when the transaction cannot be audited because it is locked in an encrypted ledger how many staff will be needed to work out what happened?
Have you ever transacted in bitcoins? And of course you know that blockchain is a concept independent of the bitcoin. It is like buying from Amazon: the transaction takes seconds to validate and clear with your bank.
I am aware of both
And have discussed both with experts
And so far the comments made suggest all I have done is upset another cult
Richard,
I don’t know who your expert advisors are.
Have they pointed you towards this
http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp605.pdf
and also this
https://www.imf.org/external/pubs/ft/fandd/2016/06/pdf/adriano.pdf
?
So experts disagree?
Next?