Imagine a financial system far more efficient than the one we have today. One that is less expensive to run and less costly to use, yet at the same time more robust and much harder to abuse. One that gives individuals more control over their financial transactions while better protecting their privacy. That helps businesses drastically simplify and reduce the cost of financial and related processes, while giving regulators far better tools to monitor and protect the system as a whole.
A revolutionary new technology, the blockchain, has arisen that is allowing our industry to reimagine the financial system along these lines. And while it is too early to say how much of the blockchain’s seeming potential we can actually achieve, like many of our peers, we at UBS believe this technology will turn out to be potentially transformative.
The trust engine
The blockchain allows parties to carry out financial (and other) transactions directly between themselves without the use of a trusted intermediary. It does so by providing a digital means for people to share reliable and tamper-proof lists of information. While this may not sound exciting, these “distributed ledgers” – as blockchain lists are called – have some very powerful capabilities. This may allow us to do many things we could not do in the past.
By facilitating direct transactions that are immediate and irrevocable, blockchain could allow us to introduce real-time settlement of transactions, a long-time industry dream. By adding full programming capabilities to blockchains we may be able to create “smart contracts,” autonomous financial agreements that live online and can enforce themselves as soon as certain predefined conditions are fulfilled. That would allow banks as well as businesses to automate a great many complex transactions, realizing massive efficiency gains. We could also build “smart wallets” for individuals that would connect them directly to the financial system, allowing them to carry out their financial transactions on their own and automatically managing their money for them. And this just touches the surface of the kinds of use cases we are currently exploring.
Together for the future
As with any nascent technology, there are of course significant challenges as well. Some are technical: blockchain today has issues of speed, scalability and security which must be addressed. Some are legal: If we want to develop autonomous smart contracts, we will likely need a new type of smart contract law. Some are systemic: if we want to have direct financial transactions, we will have to find a way to move “real money” onto the chain, as well as solve some very thorny issues around digital identity and privacy. Some are regulatory: jurisdictions around the world will want to ensure that the new technology is used in a way that drives innovation but also protects consumers and the financial system as a whole.
At UBS we strongly believe that to realize the full potential of blockchain we will above all need to collaborate on a common platform. We think it essential that the industry avoid a standards war and with it the kind of fragmentation that has bedeviled the adoption of new technologies in the past.
The good news is that we are seeing such collaboration. There are already a number of significant larger blockchain collaborative efforts, like the R3 consortium in the financial industry (of which UBS is a member) or the Linux Foundation’s Hyperledger Project. At the same time many banks, ours included, have been examining and experimenting intensely with the technology, working with peers in open, collaborative ways. These are positive steps, helping us build the pieces we need to someday solve the overall blockchain puzzle.
It is impossible to say how or when this puzzle will be solved, or what it will look like. But if we manage to build a common fabric, then I believe the large-scale transformations we think are possible can happen over the next five to ten years. With that, much of what we can only imagine today will become tomorrow’s reality.
That’s settled then: UBS announces the USC
One of the great promises of blockchain technology has been in speeding up and streamlining the trade and settlement process, increasing efficiency and potentially massively reducing costs.
In August 2016, UBS announced that it was teaming up with Deutsche Bank, Santander and BNY Mellon, as well as the fintech company Clearmatics, to promote UBS’s “utility settlement coin” (USC). The USC is a blockchain-based digital currency that financial institutions could use to directly transact securities with each other, bypassing the traditional settlement process. Initially developed by Clearmatics in conjunction with UBS, the USC is intended to be directly convertible into central bank cash. With it, banks could significantly reduce the time and cost of post-trade settlement and clearing.
UBS has been an early mover in exploring the use of blockchain technology in financial services. In April 2015 it became the first global bank to open an innovation lab at the world-renowned Level39 technology accelerator space in London.
UBS’s team at Level39 team has been experimenting with and doing proofs of concept of various blockchain-based use cases. Along with the USC, these have included a “smart bond” based on smart contract technology and a cryptocurrency based loyalty program.
Read more on UBS’s take on blockchain
For more information and analysis, see the UBS White Paper “Building the trust engine: How the blockchain could transform finance and the world.” The paper, and related material,is available here.