Malta Opportunity: Blockchain & Cryptocurrencies

The future of Maltese Banks is here

Dr. Priscilla Mifsud Parker | 13 Sep 2017

Malta Opportunity Blockchain  Cryptocurrencies

Blockchain, Cryptocurrencies & Opportunities for the Maltese Banking Industry, in the same sentence, may seem farfetched, ludicrous and potentially outrageous to some, and interesting and innovative to others. The reality is that the world we live in and the financial services and banking sector will need to embrace and also evolve to accept that change is inevitable. This fast-paced sector is highly fluid, with new innovations shaping it every day. We shall explore how the Utility Settlement Coin ("USC"), a cryptocurrency which is currently being developed by some of the world's major banks, is set to revolutionise the cryptocurrency sphere. 

The USC - revolutionising the concept of Cryptocurrency 

Cryptocurrencies started to become a reality when in 2008, Satoshi Nakamoto, the alias of the person or group of people who designed Bitcoin, published a whitepaper on Bitcoin and peer-to-peer payments. Little did he know that major banking institutions would implement his ideas.

In September 2015, Swiss bank UBS, in conjunction with Blockchain firm Clearmatics, announced the development of its own virtual currency, the USC. Since then, much has happened, with the likes of Deutsche Bank, Santander and BNY Mellon joining UBS in 2016, followed by Barclays, Credit Suisse, HSBC and others in 2017. The idea has seemingly unified traditional players in this innovative venture to create a new Blockchain-based digital currency, and UBS is currently involved in discussions with regulators and hopes that the USC may go live in 2018.

The aim of this banking consortium is to develop a streamlined Blockchain payment solution for inter-bank transactions. In order for a digital shared ledger to achieve this, a virtual medium of exchange is required – hence the USC. Although the purpose of such a cryptocurrency is to replace intermediaries and facilitate swifter institutional payments, the ultimate consequence of this project is that it will empower central banks to issue their own currencies on a Blockchain, such as those seen in Tunisia (DigiCash/eDinar/BitDinar) and Senegal (eCFA).

“From reducing risk to improving capital efficiency in financial markets, we see several benefits of this project," Barclays Investment Bank's Lee Braine told the Financial Times.

How will the USC differ from cryptocurrencies such as Bitcoin? 

Generally, there are three formats which a Blockchain database can take:

  1. a permissioned, private & shared ledger (level 1 – usually used within an organisation);
  2. a permissioned public & shared ledger (level 2); and
  3. an open/permission-less, publicly shared ledger (level 3 – such as Bitcoin).

These various levels have several shared characteristics, the most salient of which are their distributed and decentralised nature. At a glance, it is apparent that the USC is, as such, more of an internal Blockchain solution than a level 3 distributed ledger, such as that found in Bitcoin. However, what may make USCs attractive to conservative consumers and regulators alike is that they are backed by liquid assets belonging to large banks and central banks.

Whereas Bitcoin has intrinsic value as a genuine cryptocurrency, as it is truly virtual, USC will be a digital currency weighted against the fiat currency in the relevant jurisdiction. Consequently, spending USCs will be identical to spending the physical currency it is being exchanged with. Thus, the idea behind a USC is that it will be convertible with other fiat currencies, thereby allowing it to be more easily exchangeable between institutions in different countries and used as a more efficient means of payment and settlement. Having such a currency based on Blockchain will also reduce transaction risk and render exchanges immune from tampering. This is facilitated through its feature as a common currency, as well as its underlying Blockchain infrastructure.

The USC could potentially lead to the end of non-regulated cryptocurrencies as we know them today, due to the currency being centralised, regulated and asset-backed – giving greater protection to the consumer and investor. The lowering of risk will lower the astronomical returns we have seen in Bitcoin, Ethereum, Litecoin and others over the last few months.

"It may well inform the way central banks choose to move things forward," HSBC's director of financial technology innovation, Hyder Jaffrey, told Coindesk. "We see it as a stepping stone to a future where central banks issue their own [cryptocurrency] at some point."

The fact that Banks are toying with the idea of having USC, demonstrate a shift towards future cryptocurrencies to be used as a medium of exchange, rather than a speculative investment vehicle.

USCs being used for trade or settlement are seen as legitimising cryptocurrencies, something that has not yet happened with current cryptocurrencies, since they have no intrinsic value and are not a generally accepted means of exchange.

In spite of USCs not being offered to consumers as a purchasable cryptocurrency, its threat to Bitcoin and other cryptocurrencies comes in the form of the precedent it can set. Future banks may wish to create more ‘genuine’ asset-backed cryptocurrencies that are immune from credit risk, and offer them to consumers as an alternative to hyper-speculative virtual currencies such as Bitcoin.

Blockchain, Cryptocurrencies & Opportunities for the Maltese Banking Industry

Blockchain and Cryptocurrencies present a real opportunity which the Maltese Banking Industry which local banks, together with the Malta Financial Services Authority as well as their European counterparts and the European Central Bank should look into. This, coupled with the Maltese government’s favourable stance on Blockchain, may prove to be a highly lucrative opportunity for local banks, especially given that HSBC at an international level is also involved in the USC project.

Local banks could not only penetrate the Maltese cryptocurrency market with their own asset-backed local product, but will likely have the opportunity to dominate it – cementing a significant share in the market.  Ultimately, the destiny of local centrally-issued cryptocurrencies is completely in the hands of both the legislators and regulatory authorities. Internal Blockchain solutions, on the other hand, seem like a far more viable solution in the short term. Given the right conditions, there is no doubt that a local cryptocurrency can prove successful.

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