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