Today Euroclear announced it has invested in Fnality, the regulated blockchain payments consortium formerly known as the Utility Settlement Coin (USC) and owned by 16 financial institutions, including Nasdaq, BNY Mellon, State Street, and UBS. Euroclear operates Central Securities Depositories (CSDs) across Europe, including Belgium, Finland, France, Ireland, the Netherlands, Sweden, and the United Kingdom.
In October, Fnality plans to launch its first payment currency with pounds sterling deposited at the Bank of England. That makes it a so-called wholesale synthetic central bank digital currency (CBDC) where the purpose is for institutions to use it for settlement, especially for blockchain-based transactions.
This kind of tokenized cash is sometimes seen as the missing piece of the puzzle for many DLT systems that aim to enable faster, more efficient securities transactions with lower risk. Tokenized money enables same-day securities settlement (T0), whether for stocks, bonds or funds, reducing post-trade risks and creating new opportunities such as intraday FX swaps and intraday liquidity savings.
While Euroclear has a UK presence which is regulated by the Bank of England, the bulk of its activities are in the EU. With the organization on board, we’d speculate this might help towards paving the way for Fnality potentially to get authorized by the European Central Bank (ECB).
Before Euroclear joined, just four out of the fifteen Fnality member institutions were from the EU. The timing might be opportune, as the EU DLT pilot regime for securities – a large scale sandbox for tokenized securities and settlement – is likely to start at the end of this year. It’s a topic that Euroclear mentioned.
“We are pleased to be working with Fnality and our clients in shaping a cutting-edge solution on wholesale digital cash and digital securities settlement for the benefit of the whole industry,” Lieve Mostrey, CEO Euroclear Group.
Ahead of Fnality’s October UK launch, Natwest and Santander participated in a trial payment for a security issuance. The Fnality concept has been in development since 2016, but its launch path was accelerated by a 2021 decision from the Bank of England to allow omnibus central bank accounts that co-mingle funds from different institutions. This kind of account is needed to enable Fnality’s tokenized money.
Provided there is pre-funding, it means that Fnality’s settlement token can be used outside of real time gross settlement system (RTGS) operating hours. That’s important given most blockchain systems operate 24/7.
Last year Euroclear itself was involved in wholesale CBDC trials for settling government bond transactions with the Banque de France, three major French commercial banks and HSBC. Euroclear has been involved in several DLT-based projects, including payment trials with LiquidShare, an investee, and multiple blockchain commercial paper experiments. It is a participant in the HQLAX collateral tokenization project.
Meanwhile, Fnality uses a private version of the Ethereum blockchain. It’s main blockchain technology partner is Adhara, and UBS and Clearmatics initially developed the concept.