13 Jun3 great things for Financial Services if we had Central Bank Digital Currency (CBDC) on Blockchain

I was thrilled to learn of the progress that Peter Randall and the team at SETL  have made with a working Blockchain-based platform for securities settlement. I had the good fortune to see an early prototype; it impressed me then and has obviously moved on. Peter was one of the prime movers behind the success of Chi-X; this was a major disruption in the equities markets. He has a keen sense of how to weed out process inefficiencies and drive down cost.

So, let’s assume that he is on to something. What does our industry need to make the most of the technology on offer?

There is one ingredient we need in order to make the fullest use of this exciting new technology: money. Well, more precisely, a digital equivalent of each currency, exchangeable instantly and at a 1:1 exchange rate.

Imagine we had a magical black box with digital balances in all the world’s currencies. Now what might we do with it? To use the vernacular of the day, we would build three sets of “rails”, which could interact with each other.

  1. The Domestic Payments Rail
  1. The Securities Settlement Rail
  1. The FX Settlement Rail

So what?

So, we want to build these things. What difference is it going to make?

Firstly, it will massively help “reconciliations”, aka consensus. Reconciliations is the daily diet of operations folks in banks; ensuring that what we think we know in our systems agrees with what we are being told by another system, which could be external. In banks today, this reconciliation stuff is really laborious. It costs time, money & nerves.

Right at the heart of the matter in the science of Blockchain is the ability to do away with all this reconciliation. By ensuring there is “consensus”, the technology enables us take values in the system and put them in the ledger. For those readers who have not yet delved into this consensus principal, a quick read of the work of Richard Brown, the CTO at R3Cev, is vital.

As soon as we have digital money and useful technology, such as the SETL offering, we can have end-to-end securities lifecycle that use the new technology. That would eliminate swathes of reconciliation activity.

Secondly, speed. Once we have consensus, then we can speed up the settlement process. Today’s standard in securities settlement of T+3 can be reduced. So too could the cycle in FX, which has traditionally been T+2 for spot trades simply to align with the fact that most places did not know their positions until the day after they had done all their trades. If the settlement cycle decreases, this massively reduces credit risk.

Thirdly, creating a level playing field in FX markets. Today, the industry’s settlement platform in FX is CLS Bank. Hugely successful and very good at daily settlement; in 18 currencies. Given the tools it has available, CLS sets a very high bar for admitting Settlement Members and Currencies. Once currencies are available on a multi-currency platform, this will offer the with poor credit standing more easily participate in the international markets; they should be able to find a way out out of having to pay first and taking settlement risk.

Lessons Learned: A giant step for bankers is within grasping distance. Money is the missing link. Support from the central banks to enable controlled conversation of fiat to digital currency is the missing ingredient.

If we had those digital dollars, we would be able to take advantage of all the potential which new technology has to offer.

I hope you think the ideas are good; if you do, please “like” the post, share it widely and comment if you want to.

Previous Posts 

Are available on the 3C Advisory website, click here.

Publications

The Bankers’ Plumber’s Handbook

How to do Operations in an Investment Bank, or not! Includes many of the Blog Posts, with the benefit of context and detailed explanations of the issues. True stories about where things go wrong in the world of banking. Available in hard copy only.

Cash & Liquidity Management

An up to date view of the latest issues and how BCBS guidance that comes into force from Jan 1 2015 will affect this area of banking. Kindle and hard copy.

Hard Copy via Create Space: Click here

Amazon UK: Click here

Amazon US: Click Here

Thanks for your support.