Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It's happening. While there's been much talk about banks and governments creating digital currencies, so far it's been mostly words. Mitsubishi UFJ Financial Group is taking the plunge and will introduce its own virtual money, according to Japan's Asahi newspaper.

The lender, along with the two other megabanks in Japan, is part of a global consortium of more than 50 financial institutions led by blockchain technology firm R3. That means MUFG's move is likely to be followed widely and quickly in countries as far-flung as Brazil, China and Spain.

It's hard to overstate how big a change MUFG Coin could bring about. For starters, it will enable cheaper and safer global transfers of cash -- one of the motivations behind the Japanese bank's decision, according to analysts at Jefferies.

That would lessen the role of Swift, the embattled global interbank messaging platform, and make it cheaper for workers around the world to send money home. Governments will probably back the development, given that digital ledgers potentially would allow for instant identification of who owns what. That's something regulators and tax authorities crave (in most countries, including the U.S., they currently have to request such information from brokers).

As for capital markets, digital currencies could enable instant settlement of securities trades, which would obviate the purpose of marketplaces such as the New York Stock Exchange. The key point is that unlike existing forms of virtual money, which are backed by nothing but their unique code, the new versions will be backed by government fiat currency. That should rule out the kind of speculation and swings that Bitcoin exhibits.

Roller-Coaster
Bitcoin prices rose 10 times then dropped by 75 percent just to double again in the span of three years
Source: Bloomberg

MUFG Coin is also scary news for exchanges and custodians such as Bank of New York Mellon or Euroclear, not to mention trade intermediaries like the NYSE, which are already facing other threats. 

Slow Descent
The New York Stock Exchange has already been seeing volumes dwindle as competitors such as dark pools multiply
Source: Bloomberg

The danger hasn't gone unnoticed. In October, Nasdaq launched Linq, a digital-asset registry, and followed quickly with the first blockchain-documented private issue. While Nasdaq doesn’t allow trading of digital assets yet, it's a first step in that direction and has given the tech-heavy exchange a foothold in this new world.

A more cutting-edge version of a digital exchange has been created by Patrick Byrne, whose t0.com made its debut in August 2015. The site is a blockchain-based private and public equities trading platform, with its name a play on instant settlement (versus the one to three business days that are the norm on conventional exchanges). Through t0.com, Byrne has performed the first fully digital bond and stock issue, and securities lending transaction -- the kind you need to short a stock. 

So far, however, Byrne's exchange is little more than an online dream. Part of the reason why it hasn't taken off has been the issue of how to settle the financial part of the transaction, which until now could be done digitally using only Bitcoin. 

MUFG and potential followers should overcome that snag and bring Byrne's vision closer to reality. Yet it's unlikely that blockchain will send the Big Board or Swift the way of the dinosaur. The role of custodians will simply change. Nasdaq looks to be exploring already what its new life purpose will be. It's time all exchanges and custodians started doing the same.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net