Malta: Malta Opportunity: Blockchain And Cryptocurrencies The Future Of Maltese Banks Is Here

Last Updated: 14 March 2018
Article by Priscilla Mifsud Parker

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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