Banks are rolling out cryptocurrencies to move funds between them | Hacker News Reader

Banks are rolling out cryptocurrencies to move funds between them

qz.com

40 pointsjenny8lee33 comments

> "Each settlement coin would represent fiat currency like euros and dollars on a one-to-one basis, and would thus be 100% backed by collateral at the domestic central bank, according to UBS. The idea is that exchanging the digital currency as payment for assets will be a more efficient means of exchange. Because the digital coins will be backed by cash at a central bank, which cannot default (they can always print money if they have to), the crypto tokens are free from credit risk. UBS says transfers and ownership could be settled instantly—the promise of blockchain technology."

Can someone explain how this could work? Suppose on day-1, UBS has US$100M, and wants to transfer that over to HSBC. I'm guessing they are going to:

1. Create a brand new set of crypto-tokens representing US$100M

2. Send the crypto-token over to HSBC electronically

3. HSBC can then pass the crypto-tokens onto whoever they have dealings with

4. Eventually, someone is left holding the crypto-token and wants to redeem it for actual USD

5. That person/entity would then go to UBS, hand over the crypto-token in exchange for USD, with the trust that UBS will honor that request?

How is this any different from a bank issuing a IOU? Without voters/governments deciding to back UBS idea, how is the nation's central bank going to figure into this scheme?

They are essentially using blockchain for settlements. Things do get confusing as the money exchanges many hands with many strings attached.

The problem being that somehow every blockchain needs a "coin", so they now have "utility settlement coin" or cryptocurrencies.

The difference is an IOU that can be verified independently of that bank (banks don't trust each other), and the role of the central bank is to run that ledger (banks trust the central bank).

That still seems like it requires a level of trust that the original bank is holding onto the funds and has the cash liquidity to cover the total number of coins issued.

they are probably not.

banks always had their own trading platform + monetary system. fully decoupled from the economy. https://en.m.wikipedia.org/wiki/Dark_pool

there's no way they are making the system they own be subjected to mining proof and other shenanigans. it would be a very dumb move for no obvious advantage.

Right -- and isn't massively energy inefficient? I think I saw an article crop up here recently that said a processing a single BTC transaction uses something like 5.8 times as much energy as the median US household uses in a day.

Why would banks do something so monumentally wasteful when they can trust each other?

I doubt they will include the same mining consensus rules. in other words, nothing different than what they have today + buzzwords.

New cryptocurrencies don't require as much energy to mine initially

You can set up the crypto to not raise difficulty. Even a CPU based mining could do the job then.

lol. they point to a bank of England, non peer reviewed, paper that suggest a distributed ledger system which the bank can control the value and supply via policies.

that's the exact opposite of how a distributed ledger should work.

How does Ripple and Tether play into moving funds between banks. I get Tether tries to keep its value the same as USD (USDT anyway). Ripple, I don't understand... as the value per coin changes. So, how do you convert into Ripple and convert out of Ripple without risk of each coin rising or dropping in value? I'd like to see a mutual fund approach to transfers where the exchange rate is fixed for the day, so you know exactly what the exchange in and out will be.

verifying the control and transfer of funds is a huge expensive process with investment banking. There are entire companies that specialize in this type of thing.. for example, the one (and only) fintech application I've ever built was a MBS trading system. This is over 20 years ago, but the one component of that process that seemed to be immune from disruption was the trade-clearing process.. this was handled by BONY (Bank of NY.. according to the traders, one of only a few companies that could handle it). I don't know exactly what they did, but they took a 'tick' 1/32 or two off the top of the trade to manage the (up to) 3 day 'settlement' process which, presumably, involved authorizing, possibly insuring, the trade among the counter-parties, and ultimately transferred the funds to whoever involved. Now, I may be off-base on this (I'm sure someone will let me know here), but it seems like that's a pretty good use-case for a blockchain-like system. I think paxos.com is doing something around this too.

Can someone explain me the benefit over a simple public private key system between 3 or 4 players that know each others. Can't they send one of their guys to cross the street to deliver their public key in person to the other team and skip the public ledger part?

I have seen first hand how far stupid ideas can go in one of the organisations named in the article when the management is keen on them.

maybe the banks don't trust each other.

and how instead of trusting each other they will trust the bank with most computers?

Nope, they will trust the central bank. It's in the article.

so their distributed ledger consensus rule for all the peers is "check with central authority"? this is golden!

The purpose is to have a transparent ledger, in which "funny business" is immediately apparent.

If a double spend is even attempted, everyone will know what is up.

Here is a better way of thinking of it. Imagine if every bank had a database of the ledger, and announced what they believe the ledger is to everyone ever 10th of a second.

This is effectively what "blockchain" technology is providing for the network.

To me this is still a solution in search for a problem.

When did we have the last major disagreement between two major international banks on a payment?

Value of a collateral? Yes. Conflicts of lenders? Yes. Bank A saying they made the payment and Bank B saying that they never made the transaction? Between the likes of Barclays, Credit Suisse, HSBC, etc?

Non-expert here. My understanding is the reason that sort of thing doesn't happen is because every bank has a vast army of employees it pays to ensure it doesn't happen, and with the blockchain you could fire the great majority of them.

Ex-bank employee (developer on ATMs) here. This happens. Constantly. Even in automated systems. For a million different reasons.

If they trust the central bank for settlement why not trust the central bank to keep the ledger?

Because if they lie about the ledger then they more easily get away with it, as they could have secretly changed the ledger.

They aren't using proof of work.

The person of using "blockchains" is to have a transparent ledger.

That's why they have a gazillion lawyers each.

For the two parties to trade they need to agree with each other's, otherwise there are no transaction to settle. Each party can sign the transaction with its private key, and exchange the signature, so that each party has verifiable proof (from the counterparty public key) of the transaction.

And if you want to validate the keys, use the central bank as a certificate authority. A bank not approved and monitored by the central bank is not a bank and can't make payments.

Well, if you do that with 3 parties A, B and C. You have to trust everyone with access to exchange funds that they won't cooperate against you.

With blockchains, you can check if they're cooperating against you. You may even be able to prove it later in a court of law, which sounds useful.

Another big plus seems to be that it replaces 1950s era systems in most countries that, at least partially, rely on humans in the transaction feed. They also require trust, and trust requires approval in these organisations (because it has been abused before, usually by the people now approving it, who are still abusing it, but that's beside the point).

In order to avoid this banks have a ton of 1:1 relationships that are sometimes fully, sometimes partially automated and this can really be an n:n system if it's under the control of the central bank.

Leveraging blockchain as a distributed ledger is hardly "rolling out cryptocurrencies".

SO will they deploy their own blockchains? I’ve always assumed that if banks rollout their own chain, this will render all other “official” chains useless. Edit: not useless, but certainly now what people hope - so much valuable. Fiat is here to stay.

For anyone who can't access the FT link which was referenced: https://archive.fo/U2BRi

Title is actually "Banks are finally preparing to use cryptocurrency to move money between them"

Can we assume this is an opinion piece and not based in truth? Unfortunately I can't access their sources due to paywalls

their most relevant "source" is a very bad paper by bank of England. the link is in the last paragraph and is not paywalled. its not peer reviewed or based in reality either.

You can read it here: https://archive.fo/U2BRi

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