IBM: interbank currency blockchains should address emerging markets
Banks and fintechs, including USC consortium, vie to build distributed networks for FX transactions
Targeting major reserve currencies with technology to introduce blockchain-based cross-border transfer systems misses the needs of emerging markets that would benefit more from new infrastructure, according to IT giant IBM, which is rivalling fintechs in the space.
A range of companies are pursuing projects to issue digital versions of fiat currencies. Notably, this month the Utility Settlement Coin (USC) consortium announced it is building a distributed network to support foreign exchange transactions in five major currencies: the US dollar, euro, pound, Canadian dollar and Japanese yen.
But Stanley Yong, chief technology officer for IBM’s blockchain in financial services business unit, says new networks being developed for G10 currencies cannot rival existing payments infrastructure.
“What I do worry about is that it is ultimately concentrated on the most liquid currencies, which already are the main reserve and trading currencies. Hence, there’s likely not so much direct benefit for emerging countries where the need for a better system is urgent,” he says.
For the USC, a new venture named Fnality International has been established for developing its system, following a £50 million ($63 million) fundraising from 14 founding shareholders, including London-based Barclays, New York-based BNY Mellon, Tokyo-based MUFG Bank and Basel-based UBS.
The USC will be 100%-backed by fiat currency held at the respective central bank with convertibility into fiat currency at par guaranteed at all times, according to Fnality, which says that in each jurisdiction its solution will ensure settlement is achieved under local settlement finality laws and regulations.
The USC is adding another layer to the already complicated cross-border payment system
Paul Sin, Deloitte
Earlier in March, IBM said six banks will soon issue stablecoins, or tokens backed by fiat currency, on its payment network, World Wire. Among the six, Philippine bank RCBC says awaiting regulatory approval to issue the Philippine peso-based digital coin on IBM’s World Wire.
But such systems have yet to be proven in practice, particularly where cross-border payments are concerned.
Paul Sin, who is consultant Deloitte’s Asia-Pacific blockchain lab leader, says that whether blockchain-based payment networks can reduce transaction times as promised remains an open question: “The USC is adding another layer to the already complicated cross-border payment system.”
Questions to answer
IBM’s Yong also believes more questions need to be answered before banks jump on to blockchain networks. For instance, when money is transferred from Japan to the US, an American bank will end up holding a Japanese yen-backed token while the collateral remains in Japan.
“As a matter of practical implementation, banks tend to be a bit leery of trusting these agreements without them first being tested in court,” says Yong.
Clemens Wan, a solutions architect at blockchain firm ConsenSys, agrees with Yong.
Wan previously worked at distributed ledger technology firm R3 and has experience of central bank digital currency projects. He says achieving cross-regional payments is “hard, because when assets move from one region to another, they need to be validated in another region, and then morph into a different asset when they get owned by a different legal entity”.
In the meantime, some banks are getting in on the act with their own initiatives.
JP Morgan, which is not among the 14 USC backers, has been trying to sign more banks on to its Interbank Information Network, a blockchain-powered global payment-processing network. It recently added the first Asia-based bank, Chong Hing Bank, to the platform, JP Morgan said on June 13.
In another example, HSBC successfully settled more than three million foreign exchange transactions across internal balance sheets using distributed ledger technology in 2018, using its FX Everywhere tool.
Additional reporting: Luke Clancy
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