Previously called the Utility Settlement Coin, Fnality tokenizes money in an account held at a central bank to enable institutions to settle transactions such as securities, intraday derivatives, or collateral exchanges. For the settlement of blockchain transactions, it provides low risk cash on ledger, one of the factors that have held up institutional DLT adoption because this enables atomic settlement or delivery versus payment.
Next month Fnality is scheduled to go live with its first currency, a tokenized British pound. HM Treasury officially recognized it as a payment system at the end of August, and in February, the company conducted a pilot transaction with Natwest and one of its investors Santander. This is well timed as the UK plans to launch a sandbox for DLT-based financial market infrastructures (FMIs) next year.
A digital euro next?
Sources told Ledger Insights that Fnality is also actively working on a digital euro, which is reinforced by an investment earlier this year from Euroclear. However, different sources recently informed Ledger Insights that during the last three months, the European Central Bank had started canvassing banks about interest in a wholesale CBDC in addition to its active work on a retail CBDC.
When the company incorporated in 2019, it planned five currencies, Canadian Dollars, Euros, Pounds, Japanese Yen and US Dollars. On the dollar side, Fnality was one of several companies involved in the development of the DTCC’s blockchain settlement solution Project Ion.
Fnality is not short of cash
When Fnality announced its £50 million funding in 2019, the stated intention was always to raise additional funds as each currency is launched. That’s because each currency has a separate company that operates a central bank account and a distinct permissioned Ethereum blockchain network.
Last year, Fnality lost £15 million ($16.6m) but still had £27 million ($30m) cash on hand at the end of the year, partly because it issued £21.7m ($24m) in convertible loan notes during 2021.
On top of the £27 million cash in the holding company Fnality International, Fnality UK also had £4.7 million. So it is raising funds from a relatively strong financial position.
How it works
The Bank of England opened the path to deployment when it gave the green light for omnibus bank accounts, which allow the co-mingling of funds from different entities for the purposes of wholesale settlement.
While Fnality sees itself as a payment system rather than a stablecoin company, there are parallels. While stablecoins are backed by Treasury securities and commercial bank account balances, Fnality’s currency tokens are backed by a central bank account. When a bank wants to tokenize money, it transfers money to the omnibus account and the equivalent amount is tokenized. If it wants to withdraw money, the tokens are burned and money is transferred from the omnibus account to the central bank account belonging to the bank.
Opening the path to DLT adoption
There have been at least four reasons for the slow institutional DLT adoption. One of them has been the lack of low-risk cash on ledger, which Fnality helps to address. The other reasons are falling away as well.
What makes a useful network? Trading with two or three other institutions is unlikely to yield sufficient efficiencies. During the last year or so, many of the major international banks have started to build significant DLT teams, which means when a network is launched, there are more participants to trade with.
There’s also been a lack of integration with legacy systems, which is not yet resolved, but it’s starting to be addressed as the DLT teams are built.
The final piece of the puzzle is regulation. Some jurisdictions are clearer than others, such as France, Germany, Luxembourg and Switzerland in Europe, and Singapore and Japan in Asia. The UK’s FMI sandbox and the EU’s DLT pilot regime should help clarify the picture.
Arguably there’s been a fifth reason for slow DLT adoption, the challenges of creating and operating consortia. This leads on to Fnality’s backers: Banco Santander, Bank of New York Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, Euroclear, ING, KBC Group, Lloyds Banking Group, Mizuho, MUFG Group, Nasdaq, SMBC, State Street and UBS.