Bank of England Governor Says DLT Settlement Systems Could Save Billions, Facebook’s Libra Must Be Compliant Before Launch

Bank of England Governor Mark Carney told colleagues at the Lord Mayor’s Banquet for Bankers and Merchants of London June 20th that DLT (distributed ledger technology, also known as “blockchain”) used for financial settlements could save, “….billions of pounds in capital and liquidity that can be put to more productive uses.”

He also said the bank is looking at the tech for how it might enable healthy competition in finance and as a way of speeding up settlement times and reducing risks in transactions.

Carney also addressed Libra, Facebook’s new stablecoin venture and Fintech’s current hot topic.

Facebook’s Libra project is currently being backed by Mastercard, PayPal, Visa and eBay, among others :

“Earlier this week, a cooperative of technology companies proposed a new payments infrastructure based on an international stablecoin – Libra. Libra would be backed by reserve assets in a basket of currencies including sterling. It could be exchanged between users on messaging platforms and with participating retailers. As designed, Libra may substantially improve financial inclusion and dramatically lower the costs of domestic and cross border payments.”

Carney spoke favourably but unequivocally about the compliance standards Libra will be expected to maintain:

“The Bank of England approaches Libra with an open mind but not an open door. Unlike social media for which standards and regulations are being debated well after they have been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch.”

The beginning of Carney’s speech was devoted to acknowledging that finance must evolve concurrently with every other sector:

“This new economy requires a new finance. A new finance to serve the digital economy. A new finance with products that are more cost effective, better tailored, and more inclusive. A new finance to support the transition to a sustainable economy.”

But he also talked about how regulations can support “resilience”:

“It is not a one-way street, however. As we extend access, we will safeguard resilience by holding settlement account holders to the appropriate standards. Along with the FCA and HMRC, who together supervise these institutions, we are committed to applying a strengthened supervisory regime for those who apply for an RTGS (real-time gross) settlement account, to give assurance that non-bank PSPs (payment service providers) can safely take their place at the heart of the payment system.

Carney said current costs can be high and processing times often slow:

“UK card payments are convenient and they are now the most popular means of payment, but they can cost between 0.5% and 2% of the total transaction value, and it can take three days for the merchant to receive their money…The scope for improving cross border payments is bigger still. These can cost up to 10 times their domestic equivalent. Anti-money laundering checks that are rightly required can be cumbersome, and settlement is slow with money taking up to a week to reach the recipient.

Costs are also being borne in a lopsided way, said Carney:

“Most fundamentally, the new payment system must end the inequity that the people with the least money pay the most for financial services.”

Innovation is needed, said Carney, and is being led by new firms:

“The revolution of payments may not be driven by the old bank-based systems but by a new architecture.”

Carney said the Bank of England is working to ensure new parties can access the table for bidding:

“In July 2017, we became the first G7 central bank to open up access to our payment services to a new generation of non-bank PSPs. Since then, six have become members, processing over four million transactions over the past year. There is now a growing pipeline of twenty firms looking to join.”

As well:

“To support private innovation and to empower competition, the Bank is levelling the playing field between old and new. This means allowing competitors access to the same resources as incumbents while holding the same risks to the same standards.”

Carney also said the bank is overhauling its current RTGS system:

“The Bank is in the midst of an ambitious rebuild of its Real Time Gross Settlement (RTGS) system, which processes £650 billion of payments on average every day. Until recently, only commercial banks had direct access to it, and alternative payment service providers (or PSPs) had to route through participating banks. That made sense in the old financial world arranged around a series of hubs and spokes, but it is increasingly anachronistic in the new, distributed finance that is emerging.”

It is within this context of opening channels to non-bank PSPs that the Bank of England is considering DLT payment transfer systems, said Carney:

“(Improved access to Bank of England wholesale funds can)…increase competition…(and) improve inclusion and services.”

“This access could empower a host of new innovation. In wholesale markets, consortia of broker dealers are working to develop settlement systems using distributed ledger technology that could overhaul how markets operate. These consortia, such as USC, propose to issue digital tokens that are fully backed by central bank money, allowing instant settlement. This could also plug into ‘tokenised assets’ – conventional securities also represented on blockchain—and smart contracts. This can drive efficiency and resilience in operational processes and reduce counterparty risks in the system, unlocking billions of pounds in capital and liquidity that can be put to more productive uses.”

Related: Bank of England, Bank of Canada & Monetary Authority of Singapore Join in Publishing Report on Payments and Possible Use of Blockchain


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