Bank Of England Ponders Blockchain for Real-Time Money Settlement

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In order to safeguard the stability of the United Kingdom’s financial system, the Bank of England is exploring the next generation of its Real-Time Gross Settlement (RTGS) service, according to a bank document [PDF]. RTGS is the platform for providing sterling central bank reserves to provide safe final settlement for transactions between banks.

The bank has created a vision for the future RTGS service and is seeking feedback.

The distributed ledger’s resilience characteristics are potentially attractive to the bank from a financial stability perspective. It is unlikely, however, that distributed ledger technology will prove sufficiently mature to form the basis of the next generation of RTGS.

RTGS Must Change

The RTGS service must be able to respond to the changing structure of the financial system. Pressure on traditional business models, along with the opportunities presented by new technology, have resulted in the unbundling of financial services, leading to the emergence of new competitors.

The new service must interface with technologies being used in the private sector, including distributed ledgers, if and when they achieve critical mass. The distributed ledger, though still in its infancy, is a more radical innovation that creates new ways for firms to exchange value without relying on central infrastructure.

While originally designed to remove the need for banks, blockchain or distributed ledger technology (DLT) is a potentially beneficial platform for banking applications over the medium term.

What Blockchain Brings

Distributed ledger or blockchain technology, is relevant in three contexts. First, as a platform for core RTGS settlement. Second, as a platform for externally-managed securities settlement delivery versus payment (DvP) or foreign exchange payment versus payment (PvP) services requiring access to central bank money. And, third, as a platform for a digital currency that would interoperate with RTGS.

Three distributed ledger benefits are trust, resilience and shared state.

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The trust is based on the consensus needed to update the ledger. The resilience comes from the network’s geographical and technical diversity. The shared state arises from the ability to prove a node is up-to-date.

Among the three, resilience is the main potential benefit when applied to settlement in an RTGS system. The central bank operating as a neutral party already creates trust. Simple reconciliations manage the shared state.

The ability to distribute nodes physically that can operate differing software implementations, combined with data duplication across the network, could provide an RTGS system with a strong defense against cyber attacks and physical events.

Also read: Report: Block chain to rewrite the financial infrastructure’s future

DLT Offers Resilience

The research indicates gross settlement and asset transfer can operate on a distributed ledger. It also demonstrates many network resilience features in a small-scale application.

But research has also indicated the technology is not mature enough to provide the levels of robustness needed for RTGS settlement. Additional work is needed to address system scalability and privacy.

Support for PvP and DvP platforms, and future private digital currencies, requires interoperability with RTGS. One method would be for RTGS reserves to support cryptographic tokens used by distributed ledger settlement platforms.

These platforms could bring PvP and DvP to venues not currently available. It could also offer competition.

But designs for such platforms are in their infancy. Additional work is needed to determine how interfaces between ledgers need to operate, in addition to the regulatory frameworks needed.

The bank nonetheless recognizes the technologies can reshape the payment landscape. The system will thus be developed to support the scale and interoperability needed to promote safe, final settlement of obligations in new settlement venues.

The bank also will explore the privacy, security, interoperability, scalability and sustainability of distributed ledger platforms. This research will be undertaken in partnership with other central banks, academia and through the FinTech Accelerator.

Image from iStock/Chris Schmidt.

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