Many claim their announcements are groundbreaking, but today’s launch of the DLT Sterling Finality Payment System (£FnPS) really is. A trustworthy on-chain payment mechanism is one of the critical requirements to support tokenized securities and capital markets. Now the UK has one.
The first banks to go live are Lloyds Banking Group, Banco Santander and UBS.
“Transacting the first live payments over Fnality is evidence of the Fnality vision coming to life,” said Hyder Jaffrey, Managing Director of Principal Investments and Strategic Ventures at UBS. “The creation of a new systemically important global payment system is a once in a generation event.”
Fnality ticks the boxes demanded of a wholesale digital payment system. The payment instrument is underpinned by a central bank omnibus account combined with a bankruptcy remote structure. With atomic settlement or delivery versus payment (DvP), this addresses settlement risk. Plus there’s the peace of mind of the Bank of England oversight – £FnPS was designated a systemically important payment system more than a year ago.
“Systems like Fnality will help eliminate settlement risk and make wholesale payments instant and 24/7,” said John Whelan, Managing Director of Digital Assets at Banco Santander.
The banks will use Fnality’s connection to the CHAPS payment system to top up or withdraw from the omnibus account.
Fnality’s global ambitions
When Rishi Sunak was Chancellor of the Exchequer, he declared an ambition to make the UK a global hub for crypto-asset technology. The omnibus account that underpins the £FnPS was first made available while he was in that role.
Fnality is a big step towards that ambition and the launch timing couldn’t be better. The UK is finalizing its Digital Securities Sandbox, with a solution now available for on-hain settlement. In contrast, the EU will start testing wholesale payment options almost a year after the launch of the DLT Pilot Regime.
That said, potentially Fnality could become one of the wholesale solutions in the EU. This has been a stated goal since its founding, and today it reiterated plans to launch EUR and USD payment systems.
If you look at the recent additions of the DTCC and Goldman Sachs as Fnality investors, perhaps a dollar version isn’t that far off. From a Congressional perspective, a private wholesale payment system might go down easier than a wholesale CBDC. While the Federal Reserve has stated it doesn’t need Congressional approval for a wholesale CBDC, a recently published Federal Reserve paper appeared to explore the limits of what’s possible.
Digital payment use cases
Given Fnality has been more than seven years in the making, it previously trialed much of its future functionality. With the HQLAᵡ collateral management solution, Santander, Goldman Sachs and UBS tested repo transactions. The key benefit of HQLAᵡ is it enables intraday settlement of securities. For the repo trial, Fnality provided the cash leg.
For a few years, Fnality has also worked with the soon-to-launch Finteum, which enables DLT-based FX swaps. UBS is one of the banks that have committed to be part of the launch group.
Additionally, Fnality’s technology partner Adhara has a bank liquidity solution that’s integrated with Fnality.
One small step… one giant leap. But not yet
However, the emphasis is on these use cases being future supported features. Fnality and the Bank of England are taking a cautious approach, with limits imposed by the central bank. We were curious that the announcement mentioned scaling up to commercial operations.
“The transactions that have taken place have the primary objective of testing the functionality and resilience of Fnality’s world-first DLT-based wholesale payment system,” Angus Fletcher, CEO of Fnality UK responded via email.
“Our priority now is to build upon these real, live transactions to scale up volume, value, frequency and complexity of payments on £FnPS. This phased growth sits alongside broader network growth and the roll-out of additional value-adding functionalities that the underlying technology enables, subject to regulatory approval.”
He added that Fnality will empower digital payments, payment versus payment (PvP) and DvP “in both wholesale financial markets and emerging tokenised asset markets.”
Meanwhile, this has been a big month for institutional digital payments. The SIX Digital Exchange (SDX) started using a wholesale CBDC for settlement for a limited time. Although the currency is issued by the central bank, SIX developed the infrastructure.
On the institutional stablecoin front, Societe Generale FORGE relaunched its institutional stablecoin. Deutsche Bank’s DWS announced plans for a euro stablecoin joint venture. And S&P Global launched stablecoin ratings.
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