In this referenced posting at Bloomberg by an opinion columnist, we have the focus on the FX market with daily settlement transactions in the multi-trillion dollar value range. This immense value exchange is not only for settlement of goods and services across borders but also capital markets and other liquidity requirements necessary to maintain smooth global financial interactions. The author points out that a fair amount of default risk exists and that existing institutions (such as CLS Group Holdings AG) are effective at covering these risks – but only to an extent, as various currencies are not necessarily supported.
‘CLS is good at preventing mishaps in the foreign-exchange market. The trouble is, it handles only 18 major currencies. That means it misses big chunks of trades where emerging-market currencies are swapped against the dollar or the euro. Overall, the protection offered by payment-versus-payment has begun to fray: from 50% in 2013, coverage fell to 40% in 2019, according to the Bank for International Settlements. After removing claims that institutions net bilaterally, $9 trillion of daily obligations are at higher risk of accidents and mistakes. Therein lies a big opportunity for blockchain tokens to prove their utility.’
The discussion gets around to the use of blockchain networks and wholesale CBDCs to speed up settlement and further reduce risk events. We have covered these types of topics in various postings and member research. We also continue to await the Fed’s positioning on CBDCs. The author points out a number of initiatives underway to experiment with wholesale CBDCs made available to banks for these types of settlements. Worth a quick read.
‘But away from public glare, a different kind of blockchain experimentation is under way. Hong Kong’s mBridge, Singapore’s Dunbar and Switzerland’s Jura don’t come up for dinnertime discussions. And that’s just fine because they’re meant to be workhorse projects, not show ponies competing for attention with Dogecoin or the Sandbox. Through these pilot programs, important money centers are trying to speed up and secure cross-border finance. They’re doing it by exploring the use of multiple wholesale CBDCs, which will be available only to financial institutions — and not the general public — over a common platform… Take Jura, which recently passed a crucial test in a near-real setting…
Over three days in November, Natixis SA in France sold tokenized commercial paper worth 200,000 euros ($226,520) to UBS Group AG. The note was then bought by Credit Suisse Group AG, and finally returned to Natixis. All payments took place in two wholesale CBDCs — the euro and the Swiss franc. The use of distributed ledger technology made all transactions “atomic,” meaning that the security and money changed hands — in tokenized forms — without exposing any of the counterparties to a Herstatt limbo where they had parted with something of value without receiving the agreed consideration.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
