LONDON • Four of the world's biggest banks have teamed up to develop a new form of digital currency that they believe will become an industry standard to clear and settle financial trades using blockchain technology.
UBS, Deutsche Bank, Santander and Bank of New York Mellon are teaming up to develop the new digital currency, which industry experts say would raise profits for the banks but with an additional cost: job losses for thousands of people.
"Today, trading between banks and institutions is difficult, time-consuming and costly, which is why we all have big back offices," Mr Julio Faura, head of R&D and innovation at Santander, told FT.com. "This is about streamlining it and making it more efficient."
Electronic transactions still require thousands of people in offices from Texas to Bangalore to check whether they are valid, and to process them.
The cost of settling trades in the finance industry runs as high as US$80 billion (S$108 billion) a year, but customers who use Internet banking and ATMs reduce manpower costs and add to the bank's profit margin on every transaction.
Blockchain technology - a set of complex algorithms that allow cryptocurrencies to be traded and verified electronically without a central ledger - will require fewer people in the verification process, potentially from dozens to only a couple per transaction.
It will also considerably reduce time taken for transactions from days to minutes.
Regulatory approval for the digital cash system would not be a problem for the banks since blockchain transactions are easier to trace and hence make enforcement more efficient, wrote Bloomberg columnist Christopher Langer.
This could cause a lot of jobs to eventually disappear, like bank tellers whose importance has been reduced since the ATM machine was introduced, he said.
Banks may end up saving more than US$20 billion in the United States alone.
"Of course, not all those jobs will be lost and some new ones may be created, but the maths is clearly in favour of adopting blockchain for financial-transaction processing," Mr Langer wrote, adding that "that explains why banks are suddenly so keen to develop systems that will enable it".
Several rival digital cash systems are also being developed. Citigroup is working on its own "Citicoin" solution, while Goldman Sachs has filed a patent for a "SETLcoin" to allow trades to be settled near-instantaneously. JPMorgan is also working on a similar project.
SETL, a London-based group founded by hedge fund investors and trading executives last year, also aims to settle financial market payments with digital cash linked directly to central banks.
Now that companies in finance and other industries are looking to adopt blockchain, more standards-setting organisation is needed to speed up development and resolve any issues, such as how to deal with hacking attacks.
Some of blockchain's biggest backers, including people with ties to IBM and JPMorgan, gathered for a three-day meeting yesterday to work on the issue of absence of grown-up governance.