‘Bankcoin’ Is Not Currency, It Is a Digital Vehicle to Move Money

It was announced this week that four of the world’s banks—Santander, UBS, BNY Mellon, and Deustche Bank—are collaborating, along with brokerage firm ICAP, in order to produce what they’re calling a “utility settlement coin,” or USC, run on blockchain technology, originally the rails beneath bitcoin and now the talk of the financial, corporate, and technological worlds.

The so-called “bankcoin,” a term derived from its apparent similarities to bitcoin, was announced by UBS earlier last year and aims to help banks process financial transactions without middle men. This could lead to savings in the industry of anywhere from $65 to $80 million.

The USC mirrors bitcoin in rudimentary ways: it is a purely digital coin, which will be run on a blockchain. But, according to sources at ICAP, the “bankcoin” should not be classified as such, and should really be thought of as an asset-backed digital security, one which will behave exactly like its partnered fiat currency.

“Apparently each unit of their ‘coin’ is 1-1 convertible with a major currency unit,” said cryptocurrency algorithmic trader Jacob Eliosoff. “So they might have one “coin” representing US$1, another representing €1, etc, so in what sense are these ‘coins’ at all?”

Okay, so it’s not like bitcoin. In fact, it doesn’t even sound like a cryptocurrency, so maybe referring to it as a “bankcoin” is a misnomer? It is more a digital vehicle to move money.

Regardless, the point of the USC, an online security, is to bring financial transactions in the modern age, dispel some of the achingly slow processes and paperwork that leads to the million-dollar losses reported above, and, in general, make it that much easier for the banking world to move forward. Theoretically, at least; the coin is set to launch for commercial use in 2018.

“The horizon is a little long for me, but I like that they’re taking advantage of the opportunity,” said Ripple President and COO Brad Garlinghouse, who added that, though USC is an intriguing idea, the third-party neutral currencies or digital assets currently available such as bitcoin, Ethereum, or Ripple’s own XRP, present better flexibility than what is described as a bank-controlled cash-backed, online security. Can the banks even get along? Garlinghouse explores that here.

Also, Garlinghouse added, developing a blockchain, which is either the financial promised land or a desolate house of very complex yet antiquated cards,  maybe not be an area banks are well-placed to excel in.

Plus, those who saw the technology’s rise on bitcoin are slightly skeptical about its further applications, especially when talking about another online security like USC.

“None of these projects so far have convinced me that there’s a good business case for a ‘bankcoin’ in between the two natural extremes,” said Eliosoff. “One, a traditional centralized DB, say operated by a jointly-owned third party, which spares you the hassle of mining, FX rate volatility; and two, bitcoin, which has a decent track record, is properly decentralized/hard-to-censor, and is much harder to kill than a bankcoin.”

Now, as BI has extensively reported, or as the Wall Street Journal, the NY Times, Forbes, and the Financial Times have extensively reported, blockchain has huge, as yet untapped potential. The tech can be potentially utilized in every major industry, and as far as sectors like fintech go, people are giddy with the potential possibilities.

However, as with all things, possibilities eventually have to turn into reality, and, as yet, USC is the first attempt by four major banks to fully realize that future, although the fact that this digital security will be backed by cash takes away some of the advantages (and risk) offered by other options.

“In the digital asset world, it’s not a zero sum game,” says Garlinghouse. “One person doesn’t have to lose in order for another to win, which is very different from how the banking world, a mature industry at this point, operates.”

If USC is implemented on schedule, and if it runs according to the current model—where one USC coin will be issued to match, say, one GBP and another to match one US dollar, respectively backed by banks who support those currencies, this will be the first online security of its kind to launch and be backed by banks. Which, depending on your view, is a marvel, or a disaster.

To learn more about blockchain, join us at Bank Innovation Israel this November 1-3 in Tel Aviv. Learn more and register here.

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