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Fnality Global Payments (Fnality), a company backed by a consortium of major global banks, has officially joined a Distributed Ledger Technology (DLT)-based Payment-versus-Payment (PvP) FX settlement service. This move is a significant step towards enhancing efficiency, liquidity, and risk reduction in foreign exchange (FX) markets.
Here’s a breakdown of the development:
* What is Fnality? Fnality is developing a series of regulated DLT-based wholesale payment systems, known as Fnality Payment Systems (FnPS). Each FnPS is supervised by its respective central bank and allows participants to use a digital representation of funds held at central banks for instant wholesale payments. The Sterling Fnality Payment System (£FnPS) is already live and regulated by the Bank of England. Fnality’s goal is to enable real-time, cross-currency payments and atomic settlement of various transactions around the clock, utilizing institutional-grade digital cash.
* What is DLT-based PvP FX settlement?
* PvP (Payment-versus-Payment) settlement is a mechanism in FX transactions that ensures both legs of a currency exchange are settled simultaneously. This eliminates “Herstatt risk,” which is the risk that one party pays the currency it sold but does not receive the currency it bought.
* DLT (Distributed Ledger Technology), often associated with blockchain, provides a decentralized, immutable, and transparent record of transactions. Applying DLT to PvP FX settlement aims to achieve real-time, 24/7 settlement, reducing the time lags and associated risks of traditional systems.
* Fnality’s Role and the Service:
* Fnality has integrated its DLT-based settlement solution with an existing FX PvP network operated by Baton Systems (providing the underlying DLT platform) and Osttra (providing the orchestration service).
* This collaboration means that market participants using the Baton Systems and Osttra network can now choose to settle FX transactions using Fnality’s DLT-based system.
* Specifically, Fnality provides an asset with the credit characteristics of central bank money, recorded on a DLT ledger. This expands available settlement options beyond traditional commercial bank money.
* The integration has gone through a successful proof-of-concept, leveraging the Sterling Fnality Wholesale Payment System Test Environment in GBP. This demonstrated that £FnPS can serve as a settlement leg for the Osttra FX PvP orchestration service.
* Implications and Benefits:
* Expanded Settlement Choice: Participants now have greater flexibility in how they choose to settle FX transactions, including the option of using a digital representation of central bank money.
* 24/7 Settlement: The integration enables around-the-clock settlement orchestration, moving beyond traditional market hours and enhancing liquidity efficiency.
* Reduced Risk: By leveraging DLT and central bank-backed digital cash, the system aims to further reduce settlement risk and provide greater certainty in FX transactions.
* Improved Liquidity Management: Firms can better manage their overall funding burden and liquidity pressures, supporting higher transaction volumes and business growth.
* Interoperability: This collaboration is a step towards greater interoperability between different DLT systems and traditional financial infrastructure.
In essence, Fnality’s participation brings a new, regulated, and central bank-backed digital cash component to the DLT-based FX PvP settlement landscape, promising more resilient, efficient, and atomic settlement of foreign exchange trades. While currently focused on Sterling, Fnality has plans to expand its capabilities to other major currencies, including the US dollar.

Video courtesy of Thinking Crypto

Video courtesy of Thinking Crypto