As central bank digital currencies (CBDCs) march into view, a privately run version of digital fiat is adding a key tech partner.

Utility Settlement Coin (USC), the blockchain-based payments system involving commercial and central banks, will be working with ConsenSys-backed startup Adhara, CoinDesk has learned. Adhara was behind Project Khokha, which used enterprise blockchain client Quorum to see how zero-knowledge proofs performed with the South African Reserve Bank (SARB).

The move is one of only a handful of public overtures by Fnality, the company that oversees the development of USC. Fnality raised $64.5 million in June 2019 from 14 shareholders including banking giants Barclays, Santander, BNY Mellon, ING and others.

“We think adding Adhara is going to really help us. They've got experience of doing some of this type of stuff in other places,” said Fnality CEO Rhomaios Ram.

The sensitive nature of Fnality’s discussions with central banks means it likes to keep a low profile. To date, USC’s only known technology partner was London-based Clearmatics Technologies. (Clearmatics, which uses a fork of ethereum, played a key part in the inception of USC, along with Swiss lender UBS, back in 2015.)

“At Fnality we are pursuing a multi-partner strategy,” Ram said. “Part of that is associated with risk and part of that is associated with we want more people involved in this ecosystem.”

The USC is commercial bank money, as opposed to a pure CBDC, which is issued and backed by the domestic central bank and carries sovereign risk. However, the design of USC allows it to carry some of the characteristics of central bank money because the cash collateral backing the USC is held at a domestic central bank.

As stated in a mandate to its shareholder commercial banks, Fnality’s plan is to represent five currencies on its blockchain – USD, euro, JPY, GBP and CAD – and solve the so-called “cash on ledger” problem, allowing wholesale banking transactions to happen instantly, cross-border and 24/7.

An industry source close to Fnality said adding Adhara makes sense because the work the startup has already done in South Africa could evolve into a Fnality payment system. The Swiss National Bank (SNB) was also mentioned by the source as a possible custodian of Fnality’s tokenized cash.

Asked if SARB was going to be in the cards when it comes to including more central banks within Fnality, Ram said: “We can't look ahead that far. Our mandate from our investors is to focus on the five [currencies] and then, depending on how successful we are with those five, we will come to the others as and when, depending on what our investors say at that time.”

Ram acknowledged CBDCs have risen on the agenda since his company’s June 2019 fundraising, adding that Fnality has held “very casual, informational conversations with some people,” but he had no idea what their intentions were or whether it was just educational. 

Neither SARB nor SNB returned requests for comment.

The landscape has changed dramatically regarding central banks and digital currencies thanks to Facebook’s audacious plans for its Libra stablecoin. 

A key question for any large-scale, privately backed initiative in this area now is whether Libra is a good or a bad thing.

A positive scenario is that central banks now move more quickly on initiatives like USC; another possible outcome is the central banking fraternity actively discouraging private-sector experiments from encroaching any further into the territory of the state. 

Ram agreed Libra cut both ways. “It was literally both good and bad,” he said. “It was good because obviously these types of things gather a lot of attention and people that didn't take us seriously before started to. But at some level, if you are not in the detail of this it all looks the same. That can be a good or bad thing.”

John Whelan, Santander Bank’s innovation chief who is also on the board of Fnality, said it was not a question of competing with CBDCs at all.

“We see these things as entirely complementary, and it's quite likely given the regulations and the impact potentially on monetary policy … that something like Fnality will come into existence [before CBDCs]. But they are totally compatible,” said Whelan.

In light of Libra, Ram was philosophical about possible outcomes for Fnality’s ambitious plan to tokenize fiat held in the coffers of major central banks. 

“If the only thing that this [Libra] does is force the conversation and force some speed up on CBDCs – from a personal perspective that might not be great but from the investors' perspective that might still work for them [Fnality’s shareholder banks],” he said.

Fnality’s task, to create a regulatory framework and rulebook that five large central banks can digest, is ambitious in itself, nevermind coordinating the build of the various parts of the stack plus all the integration work that has to be done. 

A second source familiar with the project said Fnality’s strategy regarding its contracting framework and execution plan seemed “quite confused.”

“Whenever you have a lot of people involved in something – and they've grown their headcount quite aggressively – if you don't have a clear program and execution plan at the beginning, there's a natural tendency to kind of end up going all over the place,” the source said.

Regarding the scale of the organizational challenge, Ram said: “That is kind of the special sauce of Fnality, organizing all of these different stakeholders. That’s what we are aiming to be good at – that and driving all the legal and regulatory.”

The plan announced with last year’s fundraising was to come out with one of the main five currencies on the network by the end of 2020. 

“We have got no reason to change our minds yet. So all looks still possible,” Ram said.