Utility Settlement Coin: A project the banks can get behind

The Utility Settlement Coin initiative will tokenise fiat currencies on an Ethereum-based blockchain addressing the ‘cash on a ledger’ problem and potentially transforming the post-trade process, and, most importantly, banks are throwing their money behind it.

The ‘U’ in USC may stand for utility, but it has been the word ‘unique’ that has been thrown around far more than the official component of the acronym when describing this new highly-touted, blockchain-driven payments initiative.

Whether the word gets overused as a superlative for innovation or not is up for debate, but the fact of the matter is, the Utility Settlement Coin (USC) initiative is trying to achieve something which is currently not possible in today’s market.

And, given the team behind it are the only ones doing so through the use of blockchain technology, using central bank money and the notion of tokenisation, the project is, by definition, unique.

Initiated in 2015, the idea stemmed from a meeting between UBS and tech-firm Clearmatics, where the opportunity to facilitate payment and settlement for institutional markets using blockchain technology was raised. At its core has been the approach to collaborate with central banks, a crucial element for the project, with convertibility into fiat currency at par guaranteed at all times.

“You can either ask permission or beg for forgiveness, and USC decided to ask for permission,” says a source familiar with the initiative, citing how other similar projects had opted to move forward with plans without working with regulators and central banks to their detriment.

Essentially what was being pitched by the USC team was a way to transform current post-trade processes. The technology would allow USC to function as a single pool of funds in each currency, connected to many business platforms, or uses of cash. USC plans to enable Delivery vs. Payment (DvP) in tokenised securities markets, and in the secured funding market, while allowing instant settlement on a Payment vs. Payment (PvP) basis.

“USC will put fiat currency on a blockchain in a way that is unique and frankly better than any other initiative that I have seen in this space,” says Tom Casteleyn, global head of custody at BNY Mellon Asset Servicing, one of the backers of the project.

The best of the best

An injection of renowned FinTech talent into the project proved to be a catalyst for its elevation above any other likeminded endeavours. The likes of Hyder Jaffrey of UBS, Tim Swanson formerly of R3 (he has now joined Clearmatics) and Robert Sams, the founder and CEO of Clearmatics, were charged with steering the project and have been publicly affiliated with USC from the outset. Allegedly, the co-founder of Ethereum, Vitalik Buterin, and State Street’s Pinar Emirdag, were also advisors.

Subsequently, banks started to take notice. BNY Mellon and Deutsche Bank threw their names behind USC in the summer of 2016, joining ICAP and Santander, along with the aforementioned founders, UBS and Clearmatics.

Settlement was described by some as being primed for blockchain intervention, while others warned against its use in the process. Some proclaimed savings through distributed ledger technology (DLT) would be in the tens of billions of dollars, while T+0 was being pitched as a reality, and later proven by a Canadian-led consortium of banks proving instantaneous settlement.

USC’s proposition was far more detailed and far-reaching though. The aim was to create and deploy a regulated network of distributed Financial Market Infrastructures (dFMIs) to support the global exchange of value transactions. Initially, five currencies are in scope – CAD, EUR, GBP, JPY and USD.

“Once you have a platform where multiple currencies can be exchanged, possibly against each other, and you can do this 24/7 and in real-time there is a wide range of use cases that open up,” adds Casteleyn. “The one that we are most interested in is the PvP and DvP use case. PvP is the simultaneous exchange of two currencies against each other. Today that is near impossible to achieve in a risk-controlled manner.

“Secondly there is the use case of exchanging any asset that lives on a blockchain on a DvP basis against fiat currency. Again, that is impossible to achieve today and this in my mind is one of the reasons why growth in tokenised assets is difficult beyond the POC stage.”

Big-name backing

As time went on, the number of banks supporting the USC initiative grew, and by the end of 2017 there were 17 backers of the project, all household names. Around this time, the individual who would end up heading the project in the years to come, Rhomaios Ram, joined the USC project after nearly 20 years at Deutsche Bank.

In terms of media coverage and hype, things then went a bit quiet. While some questioned the radio silence, the reality was that there was some serious work being done in the background.

“All the banks decided between them what needed to happen if they were going to move forward with this, and at the beginning of 2018 the 17 agreed on nine outcomes,” says Olaf Ransome, COO at Fnality International. “If they were happy with those outcomes, they would all recommend strategic investment.”

“Questions were ‘do you think the technology will work? Is it going to be resilient enough? What’s the business plan?’ ‘What’s the likeliness of Central Bank acceptance?’. So all of 2018 was working on getting the institutions comfortable with this and trying to answer all these questions.”

Along the way, some banks dropped off and others joined. NEX was bought by CME, so distanced itself from USC, while Deutsche Bank, HSBC and Wells Fargo also left the consortium.

“The bank carefully reviewed the potential of the USC approach and decided not to pursue it any further,” a Deutsche Bank spokesperson said. “We will dedicate our resources to the other initiatives we are involved in and our own internal development underway across a variety of diverse use cases.”

HSBC and Wells Fargo declined to comment.

£50 million in the bank

In the first three months of 2019, USC secured its strategic investment and, by the summer, emerged from the shadows with a new brand and £50 million in its pockets to kickstart its ultimate goal.

The USC initiative would move forward under the name of Fnality International, led by C-level executives Ram, Ransome and James Coltman, formerly of Deutsche Bank. Among the directors, according to Companies House, were also Andrea Melville of Lloyds, John Whelan at Santander, and Jaffrey of UBS.

Now Fnality was live and the funding was in place, Ram and co. looked to gain regulatory approval to get at least one currency live with its series A behind it. The shareholders were announced and included State Street, BNY Mellon and MUFG, along with Banco Santander, Barclays, CIBC, Commerzbank, Credit Suisse, ING, KBC Group, Lloyds Banking Group, Nasdaq, Sumitomo Mitsui Banking Corporation, and UBS.

“Our view is that for the successful use and adoption of tokenisation, three ingredients are needed: the tokenisation of the asset, new exchanges or price discovery venues and an on-chain, digital means of payment,” Ram explains. “USC is the third ingredient, and Fnality’s challenge is to connect it to the platforms being built to support the other two ingredients. Once we have those three ingredients, we can disrupt the current business processes.”

The team at Fnality made sure to engage with central banks and regulators early and loop them in on the process. Sources said that they believe other projects have fallen by the wayside by doing the opposite. By taking a collaborative route, USC could enable instantaneous settlement, along with removing counterparty risk. Despite the USC being commercial money, it will have the characteristics of central bank money. The central bank element is interesting and crucial to the project as is the interoperability element, servicing different types of business, plugging into any form of exchange.

As one source added: “You can’t do this enterprise stuff without having cash on the ledger.”

Going forward, Ransome said that the funding and timeline will see Fnality get the first currency going live; however, the firm is not setting expectations on which one it will be.

Fnality took the approach of moving forward with all five with progress occurring in parallel. He added that the firm was prepared to put some small use cases across the platform that are currency agnostic, such as a margin payment. The project may also go beyond the initial five currencies its working on, while more stakeholders could also potentially enter the fray.