Can a blockchain tech revolutionize corporate deposits?

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One of the most significant blockchain technology experiments being undertaken around the world is a little-discussed initiative that helps banks deal with deposits from large corporate clients.

The need for it harks back to the financial crisis, Emmanuel Aidoo, head of the distributed ledger and blockchain effort at Credit Suisse, said in a recent interview. At the time, some large corporations took cash out of their bank accounts and converted it to alternative asset classes, causing liquidity problems for banks.

After the crisis, banks and international regulators were forced to change how they treated such deposits.

“Before 2008, it was all about risk-weighted assets, which model the amount of assets banks should hold on balance sheet for the type of risks they underwrite,” Aidoo said. “But these models didn’t work as they didn’t take into account corporations who removed their cash away from banks during the crisis.”

“Utility Settlement Coin is a good first step to getting real fiat cash on a distributed ledger,” said Emmanuel Aidoo, head of distributed ledger and blockchain at Credit Suisse.

Under the new Basel III framework, banks must split deposits from corporate clients into two buckets. The first is operating deposits, such as what a company would need to meet payroll for three months. The second, so-called nonoperating deposits, is everything after that. They can’t be counted on a bank’s balance sheet and banks must have high quality liquid assets to cover the amount of non-operating deposits in case corporate clients decide to pull out.

The need to hold extra securities typically costs more than the fees banks reap from these relationships.

“What’s been happening over the last five years in the banking industry is banks have been reviewing customers and are looking more closely at the profitability of each client,” Aidoo said. “As a result, banks may turn away less profitable clients.”

Yet Aidoo believes there is a solution: the Utility Settlement Coin, which relies on blockchain technology.

It takes advantage of the fact that central banks are not subject to the Basel restrictions. The Utility Settlement Coin is a smart contract that is held at a central bank as collateralized cash. It lets banks accept deposits from corporations and turn some of them into settlement coins, which are really balances held at a central bank.

Say there are five casinos in a small area and a gambler buy chips with U.S. dollars at a cashier window at one of them. If the casinos were all using Utility Settlement Coin, the gambler could go to any of the casinos with the same chips and they would honor them, letting the gambler exchange them for cash.

By the same token (pun intended), a commercial customer that deposited U.S. dollars at Credit Suisse and received utility settlement coins could cash them out at any other bank member of the utility.

To the corporate customer, one coin is the same as one U.S. dollar.

“It’s as good as cash, but it’s got one extra cool ingredient,” Aidoo said. “Because it’s written as a smart contract, it cannot be spent for any purpose other than that for which it was given. That’s pretty powerful. That’s a game changer.”

“Utility Settlement Coin is a good first step to getting real fiat cash on a distributed ledger,” Aidoo said.

Another benefit is that it’s available 24 hours a day.

“Rather than having collateral tied up overnight, you can move it around the globe way more efficiently,” Aidoo said. “When New York closes, I can do dollar transactions in Singapore and Hong Kong without having to have money parked in Asia Pacific. I can have a follow-the-sun collateral model. It’s another huge efficiency.”

The model would allow banks a way to still profit from corporate deposits. A bank could keep large commercial customers’ operating deposits in its vault while it converts non-operating deposits into Utility Settlement Coin that could be held at a central bank. The customer could still withdraw that money from any bank that also belonged to the utility, but the bank would not have to hold high quality liquid assets against such deposits.

Utility Settlement Coin was begun in late 2015 by UBS and the blockchain technology company Clearmatics. BNY Mellon, Deutsche Bank, Icap and Santander quickly joined. Credit Suisse, State Street, HSBC, Barclays, Canadian Imperial Bank of Commerce and MUFG signed on more recently, in what is now the third phase. Within a year, the participants hope to have it in production.

No central banks have signed up for this yet, though three major ones are in discussions with the group. The Federal Reserve did not respond to requests for an interview by deadline.

Yet the Bank for International Settlements, a bank for central banks, in September issued a report looking at the future of money and included Utility Settlement Coin as a part of a chart detailing the entirety of the system.

BIS described Utility Settlement Coin as “an attempt by the private sector to provide a wholesale cryptocurrency. It is a concept proposed by a collection of large private banks and a fintech firm for a series of digital tokens representing money from multiple countries that can be exchanged on a distributed ledger platform. The value of each country’s USC on the distributed ledger would be backed by an equivalent value of domestic currency held in a segregated (reserve) account at the central bank.”

Aidoo is hopeful of the outcome. “We think Utility Settlement Coin has the potential to streamline post-trade processing, reducing friction and risk,” he said.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.

Penny Crosman

Penny Crosman

Penny Crosman is Editor at Large at American Banker.

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