Talking of cryptocurrencies as an opportunity for the Maltese banking sector might sound outlandish, in the context of a highly-regulated banking industry in Malta. However if one follows the rapid developments in cryptocurrencies across the
globe, it is clearly inevitable that many industries, including traditional
banks, will have to adapt to this highly innovative evolution that is fast
permeating many economic sectors.

In this article we explore
how the Utility Settlement Coin ("USC"), a cryptocurrency
currently being developed by some of the world's largest banks, is set to give
the cryptocurrency market a new business angle.

The USC - revolutionising
the concept of cryptocurrency

Cryptocurrencies were created in 2008, when Satoshi
Nakamoto, the pseudonym of the individual or persons who designed Bitcoin,
published a whitepaper on Bitcoin and peer-to-peer payments. Since then the
interest in virtual and digital currencies and infrastructures has intensified
exponentially across industries and the adoption of this technology is being
touted as the next big disruptive process for doing business.

In September 2015, Swiss bank UBS, in
conjunction with Clearmatics, a firm that works on distributed ledger technologies,
announced the creation of its own virtual currency, the USC. Since then,
Deutsche Bank, Santander and BNY Mellon joined UBS in 2016, followed by
Barclays, Credit Suisse, HSBC and others last year. The concept of a digital
currency for banks has brought together conventional stakeholders in this novel
venture to create a new Blockchain-based digital currency, and UBS is currently
involved in discussions with regulators with a view to launching the USC in
2018.

The aim of this banking consortium is to
develop a tailored blockchain payment solution for inter-bank transactions. The
USC is set to become the digital medium of exchange between banks - a common
currency that is an efficient and risk-reduced secure means of making payments
and settle transactions, eliminating intermediaries. “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.

This venture could also see central banks issuing
their own currencies on a blockchain, such as those seen in Tunisia
(DigiCash/eDinar/BitDinar) and Senegal (eCFA). "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."

How is the
USC different from Bitcoin and other virtual currencies? 

The infrastructures of
both USC and Bitcoin are similar and have several shared features, with a
common underlying technology that makes them distributed and decentralised. However,
unlike Bitcoin that runs on an open, permission-less and publicly shared
ledger, the USC ledger is a permissioned and shared private ledger used within
one or a limited number of organisations.

But in terms of real value differences, whereas
Bitcoin’s intrinsic value is that of a genuine cryptocurrency, as it is truly
virtual, the 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. The USC will be
convertible to other fiat currencies, allowing it to be more easily
exchangeable between institutions in different countries and used as a more
efficient means of payment and settlement. This elemental difference to
currencies like Bitcoin is what will ultimately make USCs attractive to
conservative consumers and regulators alike, because they will be backed by
liquid assets belonging to large banks and central banks.

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. The fact that Banks are already working
on the idea of having USC, demonstrates a shift towards future cryptocurrencies
as a medium of exchange, rather than a speculative investment vehicle.

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. Of course, the lowering of risk will consequently also
lower the astronomical returns we have seen in Bitcoin, Ethereum, Litecoin and
others.

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
and opportunities for the Maltese banking industry

Blockchain and cryptocurrencies offer real opportunities to
local banks who should be looking into them already. This, coupled with the
Maltese government’s appetite for cryptocurrency, and with the Malta Financial
Services Authority set to amend its regulations to regulate VC for collective
investment schemes, may prove to be highly lucrative for local banks,
especially given that HSBC at an international level is also involved in
the USC project and can possibly lead a local consortium towards the adoption
of USC.

If local banks should be among the first
players to penetrate the Maltese cryptocurrency market they will likely have
the opportunity to dominate it – cementing a significant market share.
Ultimately, the destiny of local centrally-issued cryptocurrencies is in the
hands of legislators and regulatory authorities. On the other hand, internal
Blockchain solutions seem far more viable in the short term. Given the right
conditions, there is no doubt that a local cryptocurrency can prove successful.

Author:
Dr Priscilla Mifsud Parker is a private client lawyer heading our
Corporate, Trusts & Fintech areas of the firm. Having participated in Malta’s
Fintech Legislative Framework she is able to provide guidance to clients
seeking to venture into the Fintech Industry. Moreover, she also provides
assistance to individuals with regards to corporate and trusts matters.

Dr Priscilla Mifsud Parker can be contacted at [email protected] and on +356 2205 6603