Central banks could soon see a wave of technological breakthroughs – that is, if the newest members of the Utility Settlement Coin (USC) project have anything to say about it.

Initially designed as a way to minimize the role of clearinghouses by letting financial institutions pay each other directly using collateral-backed crypto tokens, the implications of the work could have a broad impact. Since the collateral associated with those tokens is to be held by central banks, the project is increasingly being seen as a step toward reimagining how fiat currency could be issued.

But the potential improvements go far beyond faster transactions with less risk to counterparties, according to several members of the consortium.

If both an asset and the currency used to pay for it are issued on a blockchain, entirely new financial products could result, they argue.

Lee Braine of the Barclays investment bank told CoinDesk:

Echoing Braine's enthusiasm was the head of blockchain research and development at Banco Santander, Julio Faura.

In interview with CoinDesk, Faura framed the benefits another way, emphasizing the power of using distributed ledgers to run encrypted, self-executing agreements:

"The idea of having a fiat-backed proxy of central bank money issued on smart contacts for financial institutions to exchange liquidity globally seems a very powerful concept," he said.

The idea of central banks issuing fiat currency on a blockchain also has the attention of Emmanuel Aidoo, the head of Credit Suisse's distributed ledger and blockchain program, who says the change could do more than streamline post-trade processing.

Aidoo said he'd been monitoring the USC for 18 months before concluding that the time was right for his bank to get involved. Indeed, it was his belief that the project could impact financial stability on the largest economic scale, that eventually led him to "help drive momentum" for its support.

He told CoinDesk:

Already, central banks around the world are exploring how blockchain technology could assist in a wide range of applications.

Central to such large-scale, diverse promise, is the ability to minimize risk between each of the individual counterparties involved in an agreement.

For example, currently, there's substantial risk in an exchange process called "delivery versus payment," which is designed to ensure securities are only moved down the value chain at as close to the moment of payment as possible, minimizing possible exposure to loss due to sudden changes in price.

Another new USC member, digital product manager of cash solutions at State Street bank, Swen Werner, said that "ensuring the settlement of financial instruments follows a strict delivery-versus-payment process is of critical importance to the industry and the success of new distributed ledger solutions."

Similarly, the head of fintech partnerships and strategy at HSBC, Kaushalya Somasundaram, explained how the solution developed with the help of blockchain startup Clearmatics, could help reduce the number of times such risky exchanges occur.

"It would be a lot more efficient to actually link up the digital currency to the central bank collateral and to be able to transfer the digital currency across," she said. "Ensuring the cash fungibility happens at once across all the legs of the transaction, and not multiple times, across each leg in a sequential manner."

Currently, the USC platform is being designed so that the value of the token is derived from collateral stored by Utility Settlement Coin members in central banks – but use of the platform itself is not contingent on central bank adoption.

However, as with any distributed ledger technology, the solution can only be only as powerful as the number of parties who adopt it. At every point of exchange between a blockchain-based asset and a centralized asset the element of risk increases, minimizing the potential benefits of a partial implementation, according to Hyder Jaffrey, the head of strategic investment and fintech innovation at UBS.

In order to minimize those vulnerabilities, Jaffrey joins many of his fellow USC members in his belief that fiat currency issued on a blockchain is essential. To help increase the chances that adoption occurs, several members said they aim to leverage their membership as a way to engage directly with central banks.

"In order to see the benefits on-ledger, you really need the breadth of [central bank currencies] available in similar time frames,” he said.

Still, he concluded with a cautious afterthought:

Digital cash image via Shutterstock