Bank-backed blockchain payments rail Fnality looks to raise £50m as it eyes digital euro – Ledger Insights

by Arthur · September 23, 2022

Fnality, the institutional payments system backed by 15 banks and Nasdaq, is looking to raise an additional 50 million pounds ($55 million), as first reported by TheBlock.

Formerly called the Utility Settlement Coin, Fnality tokenizes money in an account at a central bank to enable institutions to settle transactions such as securities, intraday derivatives or the exchange of securities. For settlement of blockchain transactions, it provides low-risk cash on the ledger, one of the factors that has held up institutional DLT adoption because it 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 completed a pilot transaction with Natwest and one of its investors Santander. This is well-timed as the UK plans to launch a DLT-based financial market infrastructure (FMIs) sandbox next year.

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A digital euro next?

Sources told Ledger Insights that Fnality is also actively working on a digital euro, bolstered by an investment earlier this year from Euroclear. However, various sources recently informed Ledger Insights that over the past three months, the European Central Bank had begun soliciting banks for interest in a wholesale CBDC in addition to its active work on a retail CBDC.

When the company was incorporated in 2019, it planned five currencies, the Canadian dollar, the euro, the pound, the Japanese yen and the US dollar. On the dollar side, Fnality was one of several companies involved in the development of DTCC’s blockchain settlement solution Project Ion.

Fnality does not lack money

When Fnality announced its £50m 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 ($16.6 million) but still had £27 million ($30 million) of cash on hand at the end of the year, partly because it issued £21.7 million ($24 million) in convertible notes during of 2021.

On top of the £27m cash in holding company Fnality International, Fnality UK also had £4.7m. So it is raising funds from a relatively strong financial position.

How it works

The Bank of England paved the way for deployment when it gave the go-ahead for omnibus bank accounts, which allow the commingling of funds from different entities for wholesale settlement.

While Fnality sees itself as a payment system rather than a stablecoin company, there are parallels. While stablecoins are backed by government 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 corresponding amount is tokenized. If it wants to withdraw money, the chips are burned and money is transferred from the omnibus account to the central bank account belonging to the bank.

Opening the way to DLT adoption

There have been at least four reasons for the slow institutional adoption of DLT. One of them has been the lack of low-risk cash on the ledger, which Fnality is helping to solve. The other reasons also fall away.

What makes a useful network? Trading with two or three other institutions is unlikely to provide sufficient efficiency. Over the past year or so, many of the major international banks have started building significant DLT teams, meaning that when a network is launched, there are more participants to trade with.

There has also been a lack of integration with legacy systems, which has yet to be resolved, but is starting to be resolved as the DLT teams build.

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.

Undoubtedly, there has been a fifth reason for slow DLT adoption, the challenges of creating and running consortia. This leads to Fnality’s supporters: 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.