COLUMN |- Olaf Ransome | How we change and realign the foundational plumbing is important.
Co-existence and convergence of the new with the old are features of all things digital assets. These are not without complications, but I’m convinced that the 3Cs in my firm’s name 3C Advisory—control, cost and capacity—are vital to the business of operations.
Designed right, the foundational plumbing s a great enabler. If we don’t, then we are stuck with awkward ways of doing things.
Existing practices and why they matter
I often summarise the sum total of things we do in financial services as “settle trades and make payments.”
Money—the means of payment—is at the centre of that. In wholesale markets that liquidity could take on a variety of forms:
- Money at the central bank. You pay with your money and your liquidity
- You have a credit balance with your correspondent or custodian: you pay with your money and the correspondent’s liquidity
- You have zero or a debit balance with your correspondent or custodian: you pay with borrowed money aka an intraday overdraft or intraday credit and the correspondent’s liquidity
- You have no money, but you have repo eligible collateral: you borrow secured via repo, paying with borrowed money and borrowed liquidity
So, there are several sources of liquidity and if you have been in financial services even only for a short time, you’ll know there are multiple applications for that liquidity. In any one currency any financial institution will have multiple accounts. Liquidity is fragmented. It cannot be in two places at once, even if in some cases we can move it quickly.
From the past
In my days at Credit Suisse, our transaction services business needed to make payments to CLS Bank for itself and its correspondent banking clients. We tested raising CHF liquidity. Our record was 9 minutes from me saying: “Test, raise 600 million Swiss, go!”, to having money in the bank. As fast as that was, it is not instant. It reminds me of the words of chief engineer Scottie in Star Trek: “Ye cannae change the laws of physics.”
In spite of the challenges, each day, pretty much, the job gets done. Whilst it is not unusual for securities trades to fail aka not settle because the seller lacks securities, it is unusual for them to fail for a lack of money. As a rule, payments are made on value date, and so too do all the FX trades in CLS settle on value date.
If our cash management or treasury teams do get it wrong, there are some instant costs. Normally, long balances will result in reduced or zero interest income, with short balances penalised with high rates. Overnight rate plus 200 bps is quite standard. That is the immediate cost; internally there might be a little bit of scrutiny on the funding numbers and later, at month end, a little bit more on the interest expense.
There is another hidden cost that very few people know of or can place properly. The cost is the cost of liquidity buffers. This is a capital requirement imposed by your banking regulator. From annual reports, we ascertain that 29 global systemically important banks (GSIB’s)have an average of approximately US$235 billion in overall liquidity buffers and that the approximately 80th biggest bank has some US$100 billion in buffers. Humour me and allow that there is a cost associated with those buffers of about 100 bps. So, every 1 billion of buffers costs 10 million per year. It is a fixed cost, rather like your car insurance. And like car insurance, if you have a crash, the buffers and the costs go up. That gets us to: “liquidity buffers which are bigger than they might be are bad for business”.
Without over analysing, I would say it is a fair big broad brush general statement that it is very hard work for an financial institution to ensure it has enough liquidity in the right currency in the right place and at the right time to settle all its trades and make all its payments. And it is an expensive resource to use. The more places we need that liquidity, in other words, the more we are obliged to fragment our cake of money into discrete slices, the harder it gets. The word “and” is the enemy.
Here comes tokenisation
Let’s allow that every major bank has a tokenised deposit, so new rails, and that there are multiple Stablecoins in any one currency, and on top of that for wholesale comes some form of CBDC or sCBDC, the synthetic variety from regulated payment systems with settlement finality. Fnality is an example of the latter.
Anything tokenised will involve a blockchain. Unlike in the legacy world, on-chain processing does not allow for overdrafts aka debit balances. Settling, be it a payment or a securities movement, requires you to have a sufficient credit balance to settle the trade or make the payment. This is a big deal. In today’s world, without correspondents and custodians giving credit lines and allowing intraday overdrafts, the wheels would simply stop turning and settling a trade would be as hard as trying to drive South through Switzerland’s Gotthard tunnel at Easter.
It is perfectly fine to hold a balance in a tokenised deposit. In your books and records, that is “just another bank account”.
In matters tokenised deposits, a summary of the challenges is: i) only works if you already have an account with the issuer and ii) no matter what, it is an extra account to manage.
In things stablecoin, I think matters are a little more complex. If I hold 1 million of a stablecoin, that to me is not a bank account. For one, it is secured, maybe a bit more or a bit less. And, with the regulated kind, coin holders have a secured interest over a discrete set of assets. So, to my way of thinking there is no singleness of money. 10 of USDC and 20 of USDT does not make 30. And, there is likely a market price, which may not be 100%. This happened to USDC a while back. Any asset a bank held would need to be marked to market.
This would get to me saying: stablecoins need to be processed like a money market fund. Each stablecoin must be processed as a discrete security. This would also mean that client holdings are off-balance sheet.
What that means in most processing systems I know of is that the asset is not a means of payment. In standard systems we use a currency for that. Using an asset to pay for things does not work with existing systems. You could have a USDC vs. tokenised IBM shares, but you’d have to process via a suspense account. I don’t know of any “let’s use a suspense account” stories which end well.
I have heard one contrary opinion, which is that Stables need to be processed like e-money. But as I understand the formalities, e-money is an unsecured general claim on the issuer. That issuer will be following some rules, like a bank has to, but in a bankruptcy event, an e-money holder is an unsecured creditor and therefore someway down the pecking order for being paid.
What about CBDC or sCBDC?
CBDC and its ubiquitous availability in multiple currencies would be one ingredient of nirvana for operations folks in banks. On its own, it is not sufficient. Two big parts would still be needed. First, more flexible access rules. Access means who is allowed to have an account. To date, regulators and central bankers have limited access to any central bank facilities and payment systems to licensed and regulated entities with a local presence.
Access to central bank accounts means you have a risk free asset and unchecked that has an impact on monetary policy; in a crisis every player wants to avoid Barclays and hold money at the BoE, which is then a self-fulfilling prophecy. We need to change the mindset; ZKB in Switzerland is a regulated bank under a well regarded regulator. It ought to be able to hold a balance in any foreign currency, even without having a local office, simply to settle trades and make payments. With that, ZKB does not need to be able to, or even want to, hold overnight balances in foreign currencies. If that wider access were possible, then a CBDC account would become a Single Pool of Liquidity aka SpooL, serving all things P: P for payments, P for DvP in securities and P for FX in PvP. The more things which one pool of liquidity can serve, the lower the need is for those big liquidity buffers.
The other ingredient is that to leverage the potential of things tokenised assets we need interoperability and programmability and 24 /7 /365 availability. Put simply, the capabilities are a product which needs managing. I would contend that the private sector is better at that discipline than the public sector.
If instead of CBDC, there was a synthetic equivalent, an sCBDC, exactly the same ingredients are needed. A synthetic CBDC happens when an organisation like Fnality creates a payment system which has a central bank account and is set up so that account or token holders have a direct, collective claim over those assets. This is known as being bankruptcy remote.
Bringing it all together
We are now designing and building the plumbing for the next generation of financial markets infrastructure. It’s liquidity that matters today and will matter tomorrow. In terms of payment instruments, anything which involves the word “and” or “extra” is just kryptonite; bad. At least in wholesale markets, too many variations on the means of payment would not be a good thing.
For my money, the goldilocks answer is: sCBDC plus access rules which are more open, plus private sector initiatives providing the interoperability, programmability and 24 /7 availability we will need.
I hope you found this month’s article useful; perhaps it helps you think about the challenges on your plate, or perhaps it just confirms that you are ‘not alone” and it is not a case of “everybody else gets it, I must be losing it.”
In any case, please let me know what you think!
On a personal note
2026 marks five years of partnership with the wonderful team at POSTTRADE 360° – and it keeps getting better.
I hope you’ll join me and the PostTrade360 team in Stockholm in September for their annual post-trade event, where I’ll be hosting a series of discussion forums with a range of guests. More on the event – click here.
Referring to himself as The Bankers’ Plumber, Olaf Ransome is founder of 3C Advisory LLC – drawing on decades of senior operational experience from large banks. To connect, find his LinkedIn page here.
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