26 Aug3 things Blockchain to understand this week.

Keeping up this topic is a real challenge. I feel much like I did when Dodd-Frank, EMIR and Clearing were foisted on us; you think you have a grasp of things, when along comes some news and you start to question what you know.

Here are my three observations for the week on the B word.

Foundations are evolving: Richard Brown is CTO over at R3Cev. His team of über smart people are going about building the foundations for using Blockchain in the Financial Services industry. His posts are worth reading; the latest is a white paper outlining their approach to building what they have called Corda, which is a protocol on which the networks can be built, on top of which will sit applications. There is discernible progress.

Central Banks are inching forward: The Bank of England is making strides. They have been exploring the possibility of a central bank digital currency (CBDC) and this week they announced they are looking for a new research lead will join a digital currencies team that is examining this subject. This is about interest, which is good. Lead times have to be allowed for.

UBS and big banks creating digital cash: Together with Deutsche Bank, Santander, BNY Mellon and Icap, UBS is trying to create a digital currency. Although this is interesting,

I see this being useful in influencing the central bank to accelerate thinking on maters CBDC than as a new payments mechanism in its own right.

There are just three types of money:

  1. Money at a central bank; what UBS and DB have at the BoE, the Fed etc.
  2. Money at a correspondent bank; what I have in CHF as a retail client of Credit Suisse or CS has as a correspondent of BNY Mellon for USD
  3. Cash

If UBS wants to issue a digital currency, those buying it are trusting UBS. At its simplest, this is the same as buying Bitcoin, albeit UBS is more trustworthy than those institutions, like Mt. Gox, which have been involved in Bitcoin. It is though still trust and quite likely not covered by deposit insurance. Today, in most developed countries there is a government guarantee for balances up to a certain amount.

Investors have a habit of not understanding issuer risk; in 2008 this came to the fore in my backyard in Switzerland when investors piled in to Lehman structured products rather than the old fashioned fiduciary and time deposits.

Lessons Learned: The team at R3Cev is doing a great job of thoughtfully building the protocols that will be the foundation of Blockchain infrastructure.

If lots of banks join UBS, then moving money around and doing banking transactions with the digital currency will work. Up to a point.

Real evolution will need CBDC and a means for swapping between fiat balances and CBDC.

It is great to see signs of progress from the BoE. The Old Lady is showing youthful agility.

Lastly; try not to worry about that overwhelming feeling caused by the flood of news on things Blockchain. Suppress any FOMO; there is no danger of a blink and missed it moment. Stay interested, stay curious and if you think you have lost the plot, fear not, you are in good company.

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.