Bank of England Explores Blockchain, Says Digital Currency is Far Off

In a transcript of a cancelled speech released online today, Bank of England Governor Mark Carney cited a "central bank digital currency" as a development that could result from its ongoing distributed ledger proof-of-concepts.

The remarks come as global central banks begin to experiment openly with distributed ledgers, a technology inspired by the decentralized, public ledgers used to run cryptocurrencies. But, whereas bitcoin and other cryptocurrencies perhaps sought to create wholly new financial systems, distributed ledger projects are aimed at reducing settlement times and enhancing security in traditional financial environments, a context that colored Carney's statements.

In his remarks, Carney stressed that such a transition to these new tools was unlikely to happen in the immediate future, calling a central bank-issued digital currency an "extreme" possibility.

Carney wrote:

"The great promise of distributed ledgers for central banks is their potential to enhance resilience. Distributing the ledger means multiple copies of the system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system."

Given this potential, he said that the Bank of England intends to continue to explore how distributed ledgers could be applied to its own infrastructure, including its own real-time gross settlement (RTGS) system.

"If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?" he asked.

Notably, this is not the first time the bank has suggested utilizing the technology in conjunction with its RTGS system.

The real-time gross settlement system currently used by the Bank of England experienced an outage lasting approximately nine to 10 hours in 2014. The incident caused "considerable inconvenience" to those affected, according to a review by Deloitte, which indicated 51% of housing transactions due on the day were delayed by several hours.

Hands-on approach

In the text, Carney also indicated that the Bank of England will open its own FinTech incubator, in part, to explore new concepts in development such as DLT.

He said the organization would also work on new methods for handling non-bank payment service providers, a move that could open up doors for blockchain businesses with such business models.

Still, it was perhaps his statements on the larger relationship between distributed ledger technology and the current systems used by central banks that is most noteworthy.

When it comes to a central bank-backed digital currency, Carney stated he feels that it could "fundamentally and perhaps abruptly reshape banking” but could also increase the "liquidity risk" by removing friction.

In some ways, it could be argued Carney said that investors in such a system would have too much freedom, a statement that showcases the internal thinking at central banks globally on the issue.

If, for an example, the stock market were to crash, a bank run could be more likely to happen because investors would be able to quickly move their stocks into (digital) cash – cash the bank might not actually hold.

Ultimately, Carney stated that, given the considerations needed, "[t]he prospect of a central bank digital currency for the UK [is], in my view, still some way off."

The speech was prepared for an event at the Lord Mayor’s Banquet for bankers and merchants yesterday, but Carney did not present it, instead memorializing Jo Cox MP, who was tragically murdered on Thursday.

Pound notes image via Shutterstock