Banks launch firm to settle transactions, peer-to-peer, on blockchain

A group of banks including State Street, Bank of New York Mellon, UBS, Credit Suisse, Banco Santander, Barclays and Canadian Imperial Bank of Commerce have formed a new company called Fnality — and raised $63 million for it — in a bid to fulfill their vision of a utility settlement coin.

What is a utility settlement coin? It’s a bitcoin-like token that banks could use to settle transactions with one another over a distributed ledger without having to go through a third party. The utility settlement coin would be fully collateralized by a fiat currency held at a central bank. So far the project supports five currencies: the U.S. dollar, the British pound, the euro, the Canadian dollar, and the Japanese yen. Settlement would be handled automatically using smart contracts, following local laws and regulations.

Banks could use this system to settle balances with one another, to handle cross-border payments, to deal with large corporate deposits, or for other purposes. If it works like it is supposed to, it could mean greater efficiency, a better way to manage liquidity, and reduced settlement, counterparty and market risk.

“We’ve always viewed this as a strategic pillar in our blockchain strategy,” said Emmanuel Aidoo, head of digital market assets at Credit Suisse.

Cross-border payments were the use most discussed this week in connection with Fnality’s launch. This may be partly due to the impact of Ripple, which has signed up some banks for its cross-border payments software and has attracted a great deal of media attention for the success of its XRP digital currency. Also, a lot of attention has been focused lately on the possibility that blockchain technology could offer a lower-cost, faster alternative to traditional cross-border payments.

Part of the thicket in the current system involves banks’ use of so-called nostro (from the Latin for “our”) accounts with each other to reconcile cross-border payments. “Many…

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