By Jude Ayua
UBS, a Swiss bank and financial services provider headquartered in Zurich, Switzerland, has successfully piloted a multi-currency blockchain-based payment system, UBS Digital Cash. In its official statement on Thursday, 7 November, UBS disclosed it developed the system “to increase efficiency, transparency and to enable the programmability of money movements for corporate and institutional clients.”
In the pilot program, UBS facilitated blockchain-based transactions with multinational corporations and financial institutions, handling domestic transactions within Switzerland and cross-border payments in U.S. dollars, Swiss francs, euros, and Chinese yuan. The pilot also involved transferring liquidity among UBS’s various entities, with plans for further development and expansion of the Digital Cash initiative. According to UBS, this blockchain system is expected to help firms manage intraday liquidity and more easily adjust liquidity buffers.
UBS Digital Cash operates on a private blockchain network accessible only to authorized clients. Transactions settle automatically via smart contracts, completing payments once they have met preset conditions. The system records and processes transfers digitally for all currencies. UBS Digital Cash also aligns with broader financial initiatives, including Swiss National Bank central bank digital currency project Helvetia focused on a wholesale Swiss franc (wCBDC) and the Bank for International Settlements-led project Agorá, aimed at facilitating cross-border payments using cental bank money and tokenized commercial bank deposits.
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Prospects for UBS Digital Cash
UBS’s staff have expressed optimism about the digital cash. Andy Kollegger, head of UBS Institutional & Multinational Banking, highlighted the importance of UBS Digital Cash for their clients. ”[It] aims to enable our clients to make cross-border payments in a much more efficient and transparent way,” Kolleger stated. He emphasized that blockchain-based payment solutions for cross-border payments are a strategic focus for UBS. “With the successful UBS Digital Cash pilot, we have reached another important milestone,” he added.
Xiaonan Zou, UBS Head Digital Assets, Group Treasury, added:
”We see the interoperability between UBS Digital Cash and other digital cash initiatives as key for the financial industry. In addition to their role in correspondent banking, they also have the potential to streamline and simplify the settlement of tokenized assets in the capital market.”
A pilot participant Janko Hahn, Head Treasury Operations at Autoneum, also noted:
“The UBS Digital Cash pilot showcased the key advantages of blockchain-based payment solutions. They make cross border transactions faster, on time and provide a seamless traceability, which is a huge benefit when operating in a global market.”
Regulatory insights
UBS Digital Cash pilot is expressive of the growing trend of blockchain adoption in the banking sector, specifically for cross-border transactions. As financial institutions like UBS adopt blockchain-based systems and smart contract-based settlements, several regulatory considerations come into play:
- Privacy and Security Compliance: A blockchain-based system such as UBS Digital Cash that allows only authorized clients to participate in transactions aligns with data protection and privacy regulations like the European Union General Data Protection Regulation. However, UBS must ensure that its system adheres to strict data privacy and cybersecurity standards, as any breach could expose users’ personal information.
- Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations: UBS Digital Cash transactions will require compliance with AML and KYC regulations. It may also require additional transparency and auditing procedures to ensure that the system cannot be exploited for illicit activities. Regulators may assess the effectiveness of UBS’s user monitoring and transactions verification system.
- Smart Contract Compliance: Settlements via smart contracts might undergo regulators’ scrutinity to determine enforceability and legal clarity given their automated nature. They must also comply with existing financial laws for appropriate regulatory oversight, particularly in the case of disputes.
- Cross-Border Payment Regulation: Cross-border payments involve navigating multiple jurisdictions. Regulatory frameworks such as the Bank Secrecy Act in the U.S. and the Financial Action Task Force’s travel rule internationally will apply to UBS Digital Cash. UBS must ensure compliance with regulations in all jurisdictions and potentially collaborate with international regulatory bodies to ensure consistent applicable standards across borders.
- Digital Currency Frameworks: Governments across the world are increasing showing interest in blockchain systems. As of September 2024, 134 countries were working on central bank digital currencies (CBDCs). Private blockchain solutions such as UBS Digital Cash might become a competition, potentially prompting government regulators to establish stricter requirements for non-government-developed digital cash systems. Regulators may assess how private digital cash solutions align with CBDC regulations, especially for use in cross-border transactions.
UBS Digital Cash pilot is a promising step towards efficient and transparent cross-border payments. While it sets the pace for similar developments, regulatory oversight over blockchain-based financial solutions is likely to increase. For UBS to scale its system, it must ensure compliance with privacy, security, AML, KYC, and cross-border payment regulations.
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About the Author: Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com
