The Bank of England, blockchain and the future of the payments industry: Innovation, resilience or both?

Jonathan Turner
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All players will have to decide what their role will become (Source: Getty)

The Bank of England's principal objective is clear: to maintain monetary and financial stability. It is, therefore, almost by definition, a risk averse institution.

Yet in a speech to leaders in the payments industry delivered last month, the Bank’s deputy governor for markets and banking outlined the need to modernise the UK’s real-time gross settlement system (RTGS). This is the beating heart of the financial system. There was specific reference made to distributed ledger technology - of which blockchain is the best known example.

Could the apparent welcome offered to this disruptive technology signal a willingness to embrace more risk? Does the technology underpinning crypto-currencies like bitcoin have a role to play in what has to be the number one aim for RTGS, namely resilience?

When PwC surveyed 16 payment executives in 2015, all but one agreed that blockchain would disrupt correspondent banking in the next five years. Survey respondents offered plenty of innovative new use cases for blockchain in payments, including in closed loops to transfer value, linking payments with other transactions and sharing payment related data.

Blockchain has clearly arrived as a significant new disruptor for the payments industry.

The survey respondents, however, did not consider blockchain in the context of the UK’s main payment system. And a quick review of its centrality to the entire financial system helps explain why. RTGS settles £500bn every day – an amount almost equivalent to a third of UK GDP.

Many other payment systems rely on it for settlement and banks rely on it to manage their liquidity. The prospect of its failure is almost too catastrophic to contemplate. But it did fail in late 2014, when the high value payments system RTGS suffered a 10-hour outage and placed resilience squarely in the spotlight. So is the call for reconsideration timely?

The PwC Payments Survey also identified that half of payment executives recognise resilience as their priority area of investment for the next five years, in some cases taking precedence over the pursuit of innovation that might provide them with competitive advantage. Does the Bank of England’s interest in distributed ledger technology run contrary to this? Are the regulators more interested in innovation than the industry players focusing on resilience? Or are the aims of innovation and resilience mutually compatible?

The payments industry is undergoing a period of dramatic change. The BoE’s approach reflects that, and it will be consulting widely as it searches for consensus on a vision for the future settlement infrastructure. All players in the payments industry, new and old, will need to decide what their role will be in that future, and be prepared to adopt a flexible and adaptive approach to supporting a new solution.

And while the Bank of England’s focus on resilience should position it as the most risk averse in the entire value chain, its willingness to embrace disruptive new technologies is a clear sign of its commitment to innovation. All players in the market should take note and start planning accordingly.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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