Credit: Shutterstock photoAccording to an article on bitcoin.com, four major banks and a broker are joining forces to launch their own blockchain-based digital currency, provisionally called “utility settlement coin.” UBS, Deutsche Bank, Banco Santander and BNY Mellon are joined in the project by the broker ICAP.
The idea of adding a unique currency to their blockchain creates a problem recognized by many people, including me: the appropriation of the blockchain by major financial institutions.
As Hyder Jaffrey, UBS’s head of Fintech innovation puts it in a quote in the bitcoin.com article, “You need a form of digital cash on the distributed ledger in order to get maximum benefit from these technologies. 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.”
To put that another way, the blockchain and Bitcoin do not exist independently; they are essentially inseparable, and any similar system has to have a token of some kind attached.
Of course, that doesn’t mean that a group of institutions cannot launch their own copycat system with their own currency attached to it, as this group is apparently planning to do. Doing so, though, introduces a whole host of new problems.
Firstly, one of the defining things about a distributed ledger system is that it is trustless, and must therefore be public. Bitcoin transactions are recorded on the blockchain and are visible to all. That ensures that users do not have to trust one central authority to keep accurate and honest records. The transparency of the system is the means to that end.
Now, call me a cynic if you will, but banks such as Deutsche and UBS do not exactly have a history of complete transparency, and I cannot for one moment envision them allowing instantaneous public viewing of their transactions, even with the kind of personal anonymity that Bitcoin allows.
A closed system between them would probably fare no better. I come from a dealing room background and I can assure you that no desk could survive if their rivals knew exactly what they were doing and therefore what their position was at any one time.
To get around that problem there would have to be an independent “trusted” authority to oversee and regulate the new currency...something like a central bank. That, of course, leads to the question: Why bother?
Why not just use a closed brokerage with agreed same day, or even instantaneous settlement in dollars, and the existing central bank? Or, better still; why not just use the blockchain to record transactions, and Bitcoin as the currency? (I understand that as currently situated there would be a capacity problem, but that could be addressed.)
The second issue is also one of trust. Giving banks the right to create their own currency has been tried in the past, and the practice was halted for a reason. It is far too easy for a bank hitting hard times to just issue more currency to pay their debts and in doing so to weaken the whole system. Presumably, to address that issue, the total amount of any such currency that can exist would have to be limited by the original protocol, again similar to Bitcoin.
That limit and an ever reducing rate of discovery are, like trustless records, an inseparable part of the blockchain, but they involve the miners being paid for what they do. That would presumably mean people outside the core group of banks having access to the currency.
Again, why not just use Bitcoin, the tried, trusted and cheap version that is out there?
Each time one of these proposals comes up, people get excited one way or another. Either they see it as the start of the golden period for digital currency in general, as the big banks lend an air of legitimacy, or the beginning of the end for Bitcoin, as the big banks take over.
In reality, what most of these proposals seem to boil down to is a small, private exchange and a currency that the banks can control without regulation by central banks. Maybe I am a cynic after all, but both of those things worry me.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
