Reports about leading banks joining forces for a new digital asset sent media into a tizzy last week. Financial Times reported that UBS, Deutsche Bank, Santander and BNY Mellon teamed up for “utility settlement coin” with plans to pitch the idea to central banks and first commercial launch in 2018.

However, Brad Garlinghouse, President and COO at Ripple, has highlighted the drawbacks of the bank-issued digital assets. He said that with leading banks creating their own digital asset, such as Citibank’s Citicoin and Goldman Sachs’ SETLcoin, the currency landscape would become even more fragmented than it is at present.

He explains, “A bank-issued digital asset can only really efficiently settle between the banks who issued it”. To that end, he points out two likely scenarios – one where banks world over adopt the same digital asset, agree on its rules, and harmoniously govern its usage; and second and more likely scenario where the banks not in the issuing group issue their own digital assets with their own sets of rules and governance.

“If banks of different digital asset groups want to settle trades with one another, they’ll have to make markets between their unique digital assets or trade between their digital assets and a common fiat currency. What a mess!”Garlinghouse added.

He further pointed out another “big” problem with the utility settlement coin’ – the digital asset could be backed by a basket of currencies.

“Once backed by cash, it’s no longer an asset; it’s a liability. Trading liabilities then ultimately requires moving cash across borders, re-creating today’s system but adding more friction!”, he noted.