In August 2016, Swiss giant UBS, along with fellow supporting institutions Deutsche Bank, Santander and BNY Mellon have announced a joint project in efforts to implement a Utility Settlement Coin. This Utility Settlement Coin, which we will dub “BankCoin”, in the vein of Brad Garlington’s brilliant article on this subject matter last year – uses the power of blockchain to create an inter-bank digital currency to make transactions between financial institutions more efficient. BankCoin was initially developed by UBS, who subsequently brought the aforementioned banks into the fold sometime before their August 2016 announcement.
“Today trading between banks and institutions is difficult, time-consuming and costly, which is why we all have big back offices” says Julio Faura, head of R&D and innovation at Santander Bank.
Current transactional machinations are indeed “time-consuming and costly”. What XRP holders are wondering is how BankCoin will impact XRP’s positioning in the market, if banks are developing their own blockchain powered cryptocurrencies.
What is UBS’ Utility Settlement Coin? And how is it similar or different to XRP?
Utility Settlement Coin is not an asset, it’s a liability! Why does this matter?
In the case of Utility Settlement Coin, UBS has already announced their plan to back the digital currency with a conglomeration of fiat currencies. To keep it simple, Utility Settlement Coin and others like it will be backed in value by US Dollar, Euro, Yen or some mix currencies depending on the issuing bank. Once a digital asset is backed by physical fiat, then like any asset it is no longer considered an asset but a liability.
Why does making a digital asset a liability decrease it’s effectiveness in innovating how transactions are processed? Well, it’s quite simple. Trading liabilities, regardless of the utilization of blockchain technology to transact, still requires the cumbersome movement of physical cash across borders to ultimately settle the payment. While blockchain technology will create more efficiency in internal bank transfers, it will not completely optimize how payments are settled.
Hyder Jaffrey, head of strategic investment and fintech innovation at UBS Investment Bank, explains Utility Settlement Coin in an interview:
“We think a distributed ledger can help banks better manage risk and increase capital efficiency. By moving post-trade processes onto a distributed ledger banks can reduce settlement risk, counterparty risk and market risk. But in order to do that, the cash that is at the root of everything banks do has to be represented on the ledger. USC is a way of representing cash on a ledger.”
While Utility Settlement Coin may be a step forward for UBS in adopting blockchain to improve inter-bank transactions, it is not a viable solution for foreign exchange. XRP, unlike Utility Settlement Coin is designed to carry no counter party risk, which clearly deems it the most optimal choice regarding global payments. The simple reason for this is that counter party risk is one of the most inherent inefficiencies of foreign exchange. In the current system monopolized by SWIFT, sometimes multiple banks must work together to be able to accommodate a large FX trade.
In short, Utility Settlement Coin is a digital currency like XRP, but it’s case use in no way conflicts with XRP and the type of transactions it is designed to settle. Banks will most likely utilize XRP for global payments, but it should not be surprising if they were to utilize the power of blockchain to optimize internal bank transfers through their own digital currencies in addition to XRP.
Why Utility Settlement Coin does not compete with XRP as a digital asset for global payments
Unlike Utility Settlement Coin, and various other BankCoins, XRP is entirely independent of third parties for redemption. XRP is the only cryptocurrency, or digital currency rather that does not entail any counterparty risk. Any other digital asset, like Utility Settlement Coin for example operates as a debt instrument (liability!) and is a form of balance, which of course carries some level of counterparty risk.
Counter party risk is part of the inherent problem of moving money across the globe utilizing foreign exchange. This is the original and core reason Ripple / XRP even exists. In the current system, Banks will trade tokens via SWIFT to transact with each other – these tokens carry fees which add to the expensive costs of FX, in addition to sometimes slow transaction times. XRP solves both these issues. Transactions cost fractions of a penny, and take 4 seconds regardless of amount.
In summation, Utility Settlement Coin is a blockchain based digital currency that is a liability and requires physical movement of cash. It is a step up for internal transactions within the UBS network (affiliate banks of the project), but these will be domestic payments – serving an entirely different role.
Will there be cooperation and adoption among banks of UBS’ Utility Settlement Coin?
Each of these BankCoins, whether it’s UBSs Utility Settlement Coin, Citi’s Citicoin, or Goldman Sach’s SETLcoin have a place in the re-development of transactional processes and options in their respective banks. This is clear, and this also goes for many future bank coins that are sure to be announced. But while the many iterations of BankCoins that are sure to come have a place in innovating past transactional processes at the banks who develop and implement them - this does not mean that Ripple/XRP is now no longer needed for global payments. Quite the opposite.
It's simply naïve to believe that suddenly banks will put aside geopolitical and competition based gripes to adopt a single blockchain asset from one, or a group of banks. Banks compete with each other for political influence, market share - and are entirely unlikely turn around, adopt a single blockchain project developed by a competing bank, and then fruitfully govern this new marketplace all while better positioning a single rival bank, or group of banks against themselves.
This is why, for example, SWIFT, a neutral entity even exists, let alone has had a 40 year monopoly on the market. If there wasn’t a clear need for a neutral entity to provide the solution that banks could adopt and not feel that they were propping up a competitor, companies like SWIFT would have ceased to exist. If the need didn’t remain, companies like Ripple Labs would have never focused on being that new innovative solution to slowly but surely take over market share from a relative technical dinosaur in SWIFT. This conclusion of the banks simply not being able to work together, is proven in the development of new BankCoins from competitors. If banks have proven that they would rather develop their own solutions for internal bank transfers then support a solution from a competitor bank, in my belief this only further strengthens XRP’s position to be the digital asset of choice, for global payments. Global payments which requires banks to connect payment gateways and provide settlements to move money globally will always require a neutral entity to be the bridge between competing banks.
Conclusion: Why UBS’s “utility settlement coin” does little to negatively effect XRP/Ripple’s penetration of the market.
Let’s keep this extremely simple, in digital currency terms we are comparing apples & oranges in the case of BankCoin vs. XRP.
Since UBS’s announcement in August 2016, several other major banks and their own blockchain based digital asset projects have come to light, some of which that have been ongoing longer then Utility Settlement Coin. Citibank has Citicoin, Goldman Sachs has SETLcoin, Bank of England has RSCoin, And lastly The People’s Bank of China has RMBCoin.
The clear similarity between most of these BankCoins (not all) is that they are mostly designed for internal bank transfers. While this will add a tinge of innovation to interbank transfers, it does not however tackle the need based case use that Ripple/XRP is solving. The adoption of blockchain and it’s benefits by banks worldwide, even in the form of their own digital assets for interbank transfers is in my opinion a good thing for Ripple/XRP. Ripple Labs since 2012 has cultivated, and even begun rolling out it’s payment gateway in Ripple to most of the aforementioned banks. Additionally, Ripple is years ahead of any other blockchain trying to tackle the ever growing need for more efficient transactions for global payments.
In short, Utility Settlement Coin is a step forward for all cryptocurrencies and especially XRP in opening banks up to the benefits of blockchain but by design does not compete with XRP.
Disclosure: This information was compiled from secondary sources and summarized for simplicity. With investing, always do your own research and never base your investments off a single article - let alone mine! I am a marketer and crypto currency holder / enthusiast (XRP holder) and in no way a financial expert. I write articles pertaining to cryptocurrency to help simplify news and data for the average cryptocurrency investor / enthusiast.
References:
1. https://www.ft.com/content/20c10d58-8d9c-11e7-a352-e46f43c5825d
2. https://www.linkedin.com/pulse/case-against-bankcoin-brad-garlinghouse
3. https://techcrunch.com/2015/07/07/citibank-is-working-on-its-own-digital-currency-citicoin/
4. https://bitcoinmagazine.com/articles/citi-working-citicoin-cross-border-payments-1435789093/
5. https://themerkle.com/top-5-cryptocurrencies-under-development-by-central-banks/
6. http://financialinstitutions.bakermckenzie.com/2017/06/07/banking-on-the-blockchain/