It's also worth pointing out that this is the part of the Bitcoin technology which people (including myself) have been saying might well be useful. Other than Bitcoin itself that is, which really isn't all that useful as an addition to anything. Being able to record, instantly and unbreakably, the ownership of assets, the transfer of assets, is indeed useful and is what is being used here.
So some people aren't quite getting this right:
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 andBank 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.
The digital cash part just isn't the important one. Yes, there's a new currency in there but it trades at 1:1 (by definition) with traditional ones and never leaves this particular settlement system. It is much more akin to the million pound notes of old than anything else. These were not general currency at all but they did exist. Within the Bank of England only and were used to show that large amounts of the Bank's money were being moved from one department to another. And that was it - this new "cash" exists only within the settlement system and is a token within it, nothing else.
It is the blockchain part of the system which is actually interesting:
The coins, each convertible into different currencies, would be stored using the blockchain, or distributed ledger technology, allowing them to be quickly swapped for the financial securities being traded.
“You need a form of digital cash on the distributed ledger in order to get maximum benefit from these technologies,” said Hyder Jaffrey, head of fintech innovation at UBS. “What that allows us to do is to take away the time these processes take, such as waiting for payment to arrive. That frees up capital trapped during the process.”
That's true but not the interesting part. Currently gaining access even to same day, let alone immediate, cash settlement is time consuming and expensive. Thus most financial markets trade (except for certain derivatives) on T+2 or T+3 terms. I sell Treasuries and I don't really get the money for two or three days. And of course I son't really confirm that the other bloke now owns the Treasuries until I've got my money. Really confirm that is - often they trade them on before I get my money and that's one of the things which makes things so complex. We've all got to take rather on trust that I really had those Treasuries, that I'm going to get my money, that the bloke who bought them will get them to trade on and so on.
This is what blockchain allows. Forget the delay in Bitcoin, that's about allowing miners to profit from mining. The blockchain allows instant verification, in a pretty much unhackable manner, that I really did own whatever I've just old, that the next person now owns it and that they can now sell it again if they should so wish.
The value to banks is that they keep vast capital buffers to over the risks that something might go wrong in this delivery and confirmation chain of two or three days. Immediate and provable transfer will remove much to all of that capital need.
UTS backers are convinced of the benefits of using the digital currency to trade anything from securities, derivatives, bonds and equities. The current clearing and settlement system is viewed as cumbersome in comparison, taking up to three days to clear a trade and tying up cash in the process.
This is estimated to cost the global financial system up to $80 billion (CHF77 billion) per year. The blockchain-distributed ledger would allow trades to be executed in real time, saving both time and money, its supporters argue.
It's just not about the cash, the currency, it's about allowing real time settlement.
We even have a useful test of this in the person of Richard Murphy, the Father of Corbynomics. Just as every compass has a butt end then it's extremely useful to have someone out there consistently wrong on matters economic and banking. Mr. Murphy fulfils this position admirably:
If banks are planning new currencies regulators need to act to curtail the risks
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.
If he says it's a new currency, a rival to Bitcoin, then clearly and obviously it isn't. There, our contention is proven. As is actually explained to him:
No, it really isn’t a new currency. It’s purely for faster and more secure settlement of existing currencies.
He refuses to believe this so further proof of our contention that it is about settlement and not about currencies.
While we could indeed say that there's a new currency here it's a known to be artificial one, one that won't escape into the wild and is as much currency as any other internal settlement method and only as much. The point is to use the blockchain to allow immediate settlement no more.
More Murphy:
Let me raise another concern now. Who taxes these trades? Where? And in what currency?
Trades aren't taxed. Profits from trades are taxed. Given that these settlement "currencies" will be 1:1, by definition, with extant currencies there is no confusion about profits nor how and where they will be taxed. Especially since the idea is that they clear through central banks....
