How Bitcoin might be integrated into the international settlements system ?

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By Othman Darwish

Financial institutions and central banks are monitoring closely the potential and opportunities of the new innovated technology  of digital currency like Bitcoin and   Blockchain . they are in a hope that this new technology will  improve the efficiency of international settlement   processes .The emergence of digital currency and blockchain technology ,and its potential advantages such as low risk, less cost, open design, speed of transaction execution  and no need for trusted intermediaries, will highly impact the current traditional international  settlement processes.
 The settlement process is defined as a legal transition  during the time span between trade and settlement, a purchaser’s rights are purely contractual and thus personal, and only after settlement, they become proprietary, terminating counterparty risk. Settlement risk appears if a party fails to deliver the terms of a contract to the other party at the time of settlement. Settlement risk can be associated with default at settlement with the existence of time differences in settlement between parities, for example, U.S. settlement of  equities, bonds, mutual funds securities  requires three business days after the transaction date (T +3), where the European standard is  (T + 2). In contrary, Blockchain technology is executed in near real time  eliminating by that any settlement risk, it is first applied in Bitcoin digital currency, it also acts as global distributed and immutable ledger. This proven secure ledger records every transaction ever made, for securities, goods or other assets including all  clearing steps processed before settlement.
Blockchain technology is able to documenting, transmitting and securing entire contractual relationships using "smart contract", Smart contract is a computer program code that is capable of facilitating, executing, and enforcing the negotiation or performance of an agreement (i.e. contract) using blockchain technology. Thus, the entire process is automated and can act as a complement, or substitute, for legal contracts, where the terms of the smart contract are recorded in a computer language as a set of instructions and recorded in blockchain. Using smart contract will highly reduce cost through streamlined back- office processes , and reduce risks by identifying and certifying transaction and  providing immutable record of transaction history. Bank Stander, the largest bank in the Eurozone suggests that  blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.
Inspired by the new innovated technology of bitcoins as  digital currency and blockchain as distributed  ledger, Setl, a London-based group founded by hedge fund investors  aims to settle a financial market payments with "digital cash" linked directly to central banks, Citigroup work on its own "citicoin" solution to allow trade to be settled in near real time, UBS,JPMorgan works on similar project, the utility settlement coins  like digital cache or citicoin aim to allow financial institution to pay for securities such as bonds and equities without waiting for traditional money transfer to be completed, instead they would use digital coin that are directly convertible to cache at central banks cutting the time and the cost of post-trade clearing and settlement risk.      

Securities  trading  is risky, time-consuming and costly, banks are now exploring , developing and experimenting how they can exploit the blockchain technology to speed up back-office settlement systems , the total cost to the finance industry of clearing and settling trades is estimated at $65bn-$80bn a year. The blockchain technology  makes it possible for trading, clearing and settlement to merge into one efficient real time process .

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