Cash on the blockchain: banks must catch up

A reliable way to settle fiat currency transactions on blockchain is the biggest obstacle holding back the financial services industry from realising the benefits of blockchain. More and more organisations are coming up with solutions, so where are the banks?

  • By Lewis McLellan
  • 11 Sep 2018
Email a colleague
Request a PDF

The Brothers Winklevoss have just launched the Gemini dollar. A blockchain trust company called Paxos launched the Paxos Standard on Monday. 

Both have the approval of the New York regulator and appear to be viable solutions to the challenge of settling fiat currency on the blockchain.

UK-based start-up Nivaura was able to create a tokenised version of sterling to settle the cash leg of a blockchain bond.

So what are the banks doing about this?

Working on it, apparently. A consortium (including Barclays, Credit Suisse, HSBC, UBS and others) has been hard at work at producing a ‘utility settlement coin’, assisted by Clearmatics and NEX. There are several similar projects going on at other banks around the world, with central banks pushing their own projects too.

Cash settlement is a vital part of financial infrastructure. The minds behind World Bank’s blockchain offered new debt instrument (Bond-i) and KfW’s blockchain ECP etc. believe that the future of capital markets is on the blockchain.

But while they’ve done a tremendous job building the infrastructure to support bookbuilding, allocation and asset transfer on the blockchain, they have to send the cash leg of the deal through traditional payment systems.

This means that valuable consequences of blockchain adoption — instant settlement, smart contract automation of payments — remain out of reach. If you wanted to do something like tokenise your spare room, you would really need to be able to settle cash on the blockchain.

It is, of course, perfectly possible to achieve all of these benefits if you’re happy to take your payment in cryptocurrency. If you’re happy to sell a bond denominated in bitcoin, then you can (and Nivaura has done just that), and without too much trouble, you can automate the payment of a coupon with a smart contract. The trouble is that, barring some extremely unforeseen circumstances, the global financial market is not about to adopt bitcoin.

The challenge is to create a tokenised version of fiat currencies. That is, a cryptocurrency version of dollars, euros, sterling etc. that can be settled on the blockchain, with a value pegged to its fiat equivalent.

The simplest way of doing this is simply to hold fiat currency in a segregated account and create tokenised versions 1:1 for each dollar held. This is the approach taken by Gemini, Paxos, and Nivaura.

This is not an especially new idea. Tether is a multi-billion dollar 'stablecoin' operated by the Bitfinex exchange. 

Tether, however, is mired in controversy, having failed to follow through with an audit to demonstrate that it was holding the funds it claimed collateralised the $2.4bn of tether it had issued.

Both Gemini and Paxos are taking much more stringent precautions and will be audited thoroughly and regularly.

Banks should get a move on in developing their own systems. As the incumbents, banks have a tremendous advantage and will likely face very little difficulty in bringing existing clients onto a new proprietary system.

However, unless they can claim a place on the cutting edge of the new technology’s development, they may lose the opportunity to steer it.

Start-ups and Winklevosses are not the only ones marking out ground in this space. Central banks are eyeing the possibility of setting up digital versions of their own currencies, although many still harbour concerns about affecting the money supply.

But if start-ups continue to drive the development, and central banks come up with their own solution, banks will face a serious challenge to their grip on the payments business.

  • By Lewis McLellan
  • 11 Sep 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 281,642.23 1086 8.16%
2 JPMorgan 270,584.56 1179 7.84%
3 Bank of America Merrill Lynch 253,429.76 853 7.34%
4 Barclays 210,456.38 780 6.09%
5 Goldman Sachs 188,752.91 614 5.47%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 37,171.06 156 6.65%
2 JPMorgan 34,910.99 67 6.25%
3 SG Corporate & Investment Banking 30,338.70 112 5.43%
4 UniCredit 29,482.91 134 5.28%
5 Credit Agricole CIB 27,998.53 136 5.01%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 11,322.29 47 9.04%
2 Goldman Sachs 10,369.68 49 8.28%
3 Citi 9,134.57 51 7.29%
4 UBS 6,515.43 25 5.20%
5 Morgan Stanley 6,459.47 42 5.16%