As one of the most important players in the financial market, United Kingdom, and England, in particular, are always a source of interest for anyone trying to figure out where the global economy is going. Now, the same issue has been further inflated by Brexit and the possible effects of the referendum, both in the case of the In and Out vote winning. During the upcoming days, all eyes will be set on the island nation and what it voters decide on June 23.
But, at the same time, far away from the spotlight of the global news media cycle, the Bank of England is apparently turning towards the future. More precisely, it looks like the same mammoth organization from the financial sector began eyeing the blockchain technology and its potential applications. The news comes at a time when blockchain appears to be constantly gaining popularity, even in circles where an already functioning cryptocurrency BitCoin is largely ignored.
Today, millions use BitCoin for things like gambling online using BTC and other everyday things. But, what will be the implication of the Bank of England entering the blockchain development race and what could be the consequences of the same process on the BTC price and other relevant factors of the existing digital currencies?
A Transcript for a Canceled Speech
The entire story was started by a transcript of a canceled speech that was released online regarding the Bank of England and cryptocurrencies. In the transcript, Mark Carney, the governor of the same institution, presented the idea of a central bank entering the domain of blockchain and digital currency. This currency could be produced from the bank’s currency distribute ledger that is being developed as a proof-of-concept.
The same statement comes as other global central banks start to test distributed ledgers. Unlike before, this takes place in a completely transparent media environment and not snuck away in some back office. These experiments are mostly inspired by the current public distributed ledgers that are decentralized and used to run the world’s cryptocurrencies.
But, while BitCoin and other similar ventures seemed out to make their own financial system, these distribute ledger initiatives are designed to reduce the settlement times and also the boost up security measures available in the traditional banking and financial environment. The same context was clearly seen in the statement Carney made. In his speech, he stressed out that this is a scenario for a more distant future. According to him, any digital currency issued by a central bank was a very extreme possibility.
In fact, he believes that the promise offered by distributed ledgers to different central banks is their potential to significantly increase the institution’s resilience. Basically, distributed ledger represents multiple copies located in a single system.
It has the power to continue to operate even if individual parts of the system are taken out of the equation. Carney pointed out that the distributed ledger takes out the single point of failure out of the equation, which was always the critical spot for any centralized system. Many serious issues come from the same centralized infrastructure, no matter how well the single point core is protected. Using blockchain, this does not have to worry anyone anymore.
Bank of England and RTGS
Because of the tech clear potential, the Bank of England will continue to explore possibilities about the blockchain and its distribute ledger feature. In particular, they will examine how the tech can be applied to the existing infrastructure, especially the RTGS (real-time gross settlement) systems. Carney believes that in the case of a blockchain solution being able to provide a more effective ways for private companies to settle securities and deliver payments, the tech could be applied directly to the traditional payment system.
At the same time, while this sounds promising, Bank of England is not the first such institution that was connected the ideas of blockchain and RTGS systems. Others have also had the same idea, but so far, there are no practical solutions or even prototype system. The current RTGS system utilized by the Bank of England had a crash period that lasted about 10 hours back in 2014.
The same incident produced a lot of inconvenience for those who were affected, along with over 50% of all housing transactions that took place on that day. Instead of arriving at their destination, they were delayed by several hours. Having a system that makes this virtually impossible to occur again would be an effective barrier against the same problem in the future.
A Hands-On Approach
The transcript that was published also hints that the Bank of England plans on opening its FinTech-based incubator. Its purpose will be, partly, to explore the new possibilities when it comes to blockchain development. The same organization should also work on brand new ways payments to non-bank service providers could be handled. This is important because such move could potentially open up doors to business that already possess this type of technology under development.
But, the biggest implication of the transcript is the potential growth of the relationship between the currency traditional banking system and the distributed ledger. On the topic of a digital currency that is backed by a central bank, Carney stated that this could abruptly and fundamentally reshape the current banking environment, but that it could also increase the liquidity risk through the process of removing friction. This means that he believes that investors in such system would attain too much freedom, which is an idea that is shared by other global banks.
For example, if there were to be a crash in the stock market, the banks could fall soon after because the investors would be able to get to their cash a lot faster by selling stocks quickly using a digital currency. The same cash the banks probably would not have at their disposal, leading to the banks failing as well. In this scenario, like in E-Sports and other digital ventures, the flow of cash and data would become essentially the same things.
Carney underlined that many serious considerations are needed for any prospect of a digital currency that is backed by a central bank. His speech was to be delivered on the Lord Mayor’s Banquet which was to be held for merchants and bankers, but it Carney chose not to present it. Instead, Jo Cox, the tragically murdered MP was memorialized on the same occasion, but the speech ended up being published online.