Swiss bank UBS (UBSG.S) is leading a team of four of the world's biggest banks developing a system to enable financial markets to make payments and settle transactions quickly using blockchain technology.

UBS has developed a "Utility Settlement Coin" (USC), which is a digital cash equivalent of each of the major currencies backed by central banks, such as the dollar or euro, rather than a decentralized new digital currency such as bitcoin.

The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. Spending a USC would be the same as spending the real currency it is paired with, UBS said.

Blockchain projects such as this have the potential to shake up the settlement system used by banks, under which transactions can take several days to finalize and which costs the financial industry $65-$80 billion a year, according to an Oliver Wyman report last year."

Digital cash is a core component of a future financial market fabric based on blockchain technologies," UBS Investment Bank's head of fintech innovation Hyder Jaffrey said.

The Swiss bank first launched the concept in September 2015 with London-based blockchain company Clearmatics, and has been joined on the project by BNY Mellon (BK.N), Deutsche Bank (DBKGn.DE), Santander (SAN.MC) and brokerage ICAP (IAP.L).

Blockchain works as a tamper-proof shared ledger that can automatically process and settle transactions using computer algorithms, with no need for third-party verification.

Because it does not require manual processing, nor authentication through intermediaries, the technology can make payments faster, more reliable and easier to audit.

Similar systems are being developed by others, such as SETL, a London-based start-up run by City grandees, while some major banks are working on their own projects. But this is the first time big banks have teamed up to work on a digital cash settlement system.  

Financial regulators are still trying to assess the implications of blockchain - also called "distributed ledger technology" - and whether it could meet technical, governance, legal and regulatory requirements.

The World Economic Forum said in a report this month that more than 90 central banks are discussing the use of blockchain, and estimated that 80 percent of the world's commercial banks would have initiated projects using the technology by 2017."

The practical use and implementation possibilities of central bank digital currency is rightly becoming a hot topic in the financial service industry," Deutsche Bank Global Transaction Banking Chief Digital Officer Edward Budd said.

"It raises questions, and possibilities, over a fundamental market structure principle: who can have access to central bank money and how," he said.(Additional reporting by Andreas Kroener in Frankfurt; editing by David Clarke)