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UK Central Bank Says New Payments System Will Be Blockchain Friendly

The Bank of England’s updated payments system will be compatible with blockchain-based financial technology forms, Reuters reported Monday.

The announcement is the latest in the BoE’s ongoing efforts to modernize its Real-Time Gross Settlement system (RTGS), which is essential for banking and trading in Britain and handles transactions worth around ‎£500 billion annually, or almost a third of the country’s economic output. The upgraded system is expected to be launched in 2020, and will be designed to be resistant to cyber-attacks while also being available to a wider number of smaller businesses.

This would enable these businesses to use the system directly, rather than through a proxy of a large bank.

In March, the BoE presented a “proof of concept,” asking several firms, including payments technology providers Baton Systems and Token, R3 and Clearmatics, for feedback. They were asked to examine whether the “renewed” cloud-based RTGS service would be able to interact with systems based on distributed ledger technology (DLT) and how its functionality could be expanded through the use of new technologies.

“All participants confirmed that the functionality offered by the renewed RTGS service would enable their systems to connect and to achieve settlement in central bank money,” the BoE explained Monday. “A number of recommendations were received to ensure optimal access to central bank money.”

One of those recommendations was to explore the possible use of “cryptographic proofs” to protect data from being stolen or altered.

Bank of England image via Shutterstock

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Bank of England: Deputy Governor Warns Financial Institutions of Crypto Asset Risks

A Bank of England deputy governor has written a letter of warning Thursday, June 28, to CEOs of financial institutions about the risks of exposure to crypto assets.

Sam Woods, the Deputy Governor and CEO of Prudential Regulation Authority (PRA), began the letter by reminding the institutions of their obligations to PRA rules, including acting in a prudent manner, having effective risk management systems and strategies, and cooperating with regulators.

Wood notes that crypto-asset market products have “grown quickly” and “exhibited high price volatility and relative illiquidity” in their “short history,” leading to concerns about their vulnerability to fraud, manipulation, use in money laundering and terrorism financing, and reputational risks to firms involved with them.

The provides guidelines for dealing with crypto-assets, highlighting the need for the “highest levels of executive management” to assess involvement with the crypto asset class. Firms must ensure that they are not engaging in “excessive risk taking” and should “conduct extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks.”

Wood does note the “significant potential” of distributed ledger technologies, like blockchain, to improve the efficiency of the traditional financial system in the future.

Last week, the Bank of England had announced plans to rebuild its Real Time Gross Settlement (RTGS) system so that it can interface with private business and platforms using distributed ledger tech.

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Bank of England Warns Finance Firms Over Crypto Risks

The Bank of England’s deputy governor for prudential regulation has warned banks about exposure to cryptocurrency-related assets in a new letter.

Sam Woods, chief executive of the Prudential Regulation Authority (PRA) – a financial services regulator in the U.K. – wrote Thursday that banks, insurance companies and investment firms should take steps to protect themselves against market volatility and potentially risky investments in the crypto space.

The deputy governor’s warning focused strictly on the tokens themselves, reminding financial institutions that they have a fiduciary responsibility under PRA regulations.

Woods wrote:

“In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks. Entering into activity related to crypto-assets may give also rise to reputational risks.”

The letter further stated that financial institutions should take steps to minimize any possible risk caused by trading in crypto assets, including having a PRA-approved Senior (Insurance) Management Function auditor review and authorize risk assessment frameworks for dealing with the new class.

Firms must also avoid excessive risk-taking, ensure access to experts in crypto assets and conduct due diligence on any assets they may want to trade in.

“Classification of crypto-asset exposures for prudential purposes should reflect firms’ comprehensive assessment of the risks involved,” Woods wrote, adding that these classifications should cite potential risks when investing in cryptocurrencies.

The deputy governor also pushed back against the idea that cryptocurrencies are a form of money, saying “crypto-assets should not be considered as a currency for prudential purposes.”

In the letter, Woods also took the time to acknowledge that distributed ledgers and blockchain technology exist separately from cryptocurrencies, writing, “We also recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.”

Bank of England image via Shutterstock

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Bank of England to Rebuild Settlement System to Interface with Blockchain Platforms

The Bank of England is planning to rebuild its Real Time Gross Settlement (RTGS) system so that it can interface with private business and platforms using distributed ledger technology (DLT), the bank’s Governor Mark Carney announced in a speech June 21.

Speaking at Mansion House in London, Carney said that the bank will conduct an “ambitious rebuild” of its RTGS system, which is, according to him, the backbone of every payment in the U.K. RTGS is a system generally used to transfer large volumes of funds between banks.

The bank is looking to reorganize the existing RTGS so that private payment platforms could plug in directly to the bank’s system. “Our new, hard infrastructure will be future-proofed to your imaginations, opening up a range of potential innovations in wholesale markets, and corporate banking and retail services,” Carney said.

The Governor also mentioned that the bank has begun working together with the Bank of Canada, the Monetary Authority of Singapore, and some private-sector organizations to upgrade inter-bank cross-border payments, including initiatives based on DLT. He said:

“The potential returns are large. At present, cross-border payments can cost ten times more than domestic ones. We estimate that in the U.K. alone there is scope to realize annual savings of over £600 million. Most fundamentally, the more seamless are global and domestic payments, the more U.K. households and businesses will benefit from the new global economy.”

Carney asserted that the new system will help fight money laundering and financing of terrorism, as well as advance access to the domestic and international financial systems.

The RTGS renewal Proof-of-Concept (PoC) was initially proposed in May 2017. The bank then concluded that DLT was “not yet sufficiently mature to provide the core for the next generation of RTGS,” however it placed a high priority on ensuring that the improvement of RTGS functionality is capable of interfacing with DLT.

In April, the Bank of England released a PoC paper that examines how to configure a distributed ledger system which would maintain privacy between participants, keep data shared across the network, and also enable a regulatory body to oversee all transactions. The central authority would have the power to issue and retire new units of assets and grant access permissions to all participants. No party other than the regulator would be able to infer details about transactions they are not party to.

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Central Banks Will Jump-Start the Decentralization of Money

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Whether bitcoin or its imitators eventually achieve global ubiquity, they have already achieved success in one fundamental way: forcing humans to rethink their relationship with money and banks.

Cryptocurrencies weren’t on the ballot during Switzerland’s “sovereign money” referendum last weekend, in which Swiss citizens rejected by a ratio of three to one a proposal to end fractional reserve banking and give sole money-creation authority to the Swiss National Bank. But they were the elephant in the room.

The very presence of the crypto alternative, I believe, will eventually force economies worldwide to disintermediate banks from money, yet the direct authors of that change won’t be activist voters wielding ill-conceived referenda or crypto enthusiasts voting with their wallets.

The first phase of a transition toward a true “money of the people” will be implemented by central banks themselves, striving and competing to remain relevant in a post-crisis, post-trust, digitally connected global economy.

That might disappoint adherents of the cypherpunk dream who birthed bitcoin. But the good news for those who want governments out of money altogether is that when currencies become digital – and enjoy all the bells and whistles of programmable money – they will foster more intense global competition among themselves.

When smart contracts can manage exchange rate volatility, for example, people and businesses involved in international trade will not need to rely solely on the dollar as the cross-border currency of choice. This more competitive environment will ultimately open the door to non-government digital alternatives such a bitcoin.

Backlash against CBDCs

To be sure, official enthusiasm for central bank-issued digital currency, or CBDC as it has become known, has waned somewhat as the old guard of central banking has dug in its heels.

At the Bank of England, which spearheaded research into the idea three years ago, Governor Mark Carney has lately warned of financial instability if his institution were to directly provide digital wallets to ordinary citizens — a change that would, in effect, give everyone the same right to hold reserves at the central bank as regulated commercial banks.

The Bank of International Settlements – a kind of international club for central banks – has echoed Carney’s concerns, as have other officials.

This backlash, which suggests that the bank supervisory teams within central bank bureaucracies have regained ascendancy over technologists and innovators in their internal debates over CBDC, stems from a well-founded expectation: bank runs would be a real possibility.

Why hold your money at risky, friction-laden institutions paying near-zero interest when you can store at zero risk with the central bank itself and trade it automatically with other fiat digital wallet holders?

But why, also, should we care what happens to banks?

Banks are the problem

The only reason to promote digital fiat currencies is precisely to bypass the banks. Whether the currency is fiat or decentralized, banks are the problem. The technical, social and regulatory infrastructure upon which they operate is decades old and fraught with unnecessary compliance costs.

Banks maintain centralized, non-interoperable databases on outdated, clunky COBOL mainframes. They rely on multiple intermediaries to process payments, each managing their own, siloed ledgers that must be reconciled against each other through time-consuming fraud-prevention mechanisms.

All these inefficient systems, instituted to address the problem of trust, merely add to the cost of trust in the system.

“Why, in a digital age, can’t we move money around 24/7? Because we have bad middleware, and that bad middleware is existing financial infrastructure,” says Charles Cascarilla, CEO of Paxos, which is building blockchain-based trading infrastructure for the financial system.

In addition, there’s the massive political risk that comes with banks’ involvement in our payments system.

The reason why it was deemed necessary for governments to bail out the world’s banks to the tune of trillions of dollars in 2008 was that not doing so would have thrust our highly complex payments systems into chaos. The global economy would have had a cardiac arrest. It’s that threat of bringing us all down with them that gives “too-big-to-fail” banks a hold over policymaking.

Many central bankers, still smarting from the fallout from that crisis, know this is the problem. Many see real benefits in removing banks from payments and recognize that digital currencies can help. The question is how to get there without fomenting chaos.

Gradual solutions

One solution: a phased approach over time. You don’t provide CBDC to everyone at first; you start with large non-bank financial institutions, follow it up with a certain class of large corporations, then move to smaller businesses, and only make it available to individuals as a last step.

Another solution: the introduction of a unique, central bank-determined CBDC interest rate. This would be an addition to the central bank toolkit for managing money supply, which currently hinges on a combination of a policy rate imposed on banks’ reserves and interventions in the two-way market for buying and selling government securities with banks.

A separate CBDC interest rate would provide a means to calibrate the flow of money between banks and digital fiat wallets, potentially within a long-term plan to gradually shift it from the former to the latter without overly disrupting the system.

As Sheila Bair, the former Chair of the Federal Deposit Insurance Corp., argued in a recent op-ed, this new interest rate tool could enhance monetary policy, as central banks could use it to either stimulate or cool the economy. By directly affecting the rate at which people’s currency holdings grow, incentives to save or spend could be directly implemented.

Still, I don’t see developed-world central banks rushing to do this. Their relationships to commercial banks are too entrenched. And, for now at least, it’s hard for many in that system to even conceive of a monetary system that doesn’t revolve around them.

But it’s different for developing-world central banks. For too long those countries’ monetary policy has been driven by the policies of the world’s biggest central bank, the Federal Reserve. If the Fed cuts rates, foreign, inflationary money floods into their bank-centric financial systems; if it hikes rates, they face deflationary risks. In theory, a fiat digital currency could allow them to offset those forces.

Now, of course, all of this could go wrong. A new tool for profligate governments to debase their citizens’ money does not look desirable. For proof, look no further than the rogue state of Venezuela and its new, centrally controlled digital currency, the petro.

Yet that may also be what ultimately gives bitcoin, or some other viable altcoin, a chance to shine, especially as Layer 2 solutions start to help with scalability and liquidity. Central banks can’t put the cryptocurrency genie back in the bottle. Their potential embrace of digital fiat currencies will happen in an era when their citizens have a choice – they can shift to these new decentralized solutions, with increasing ease.

Whether they take over the world or not, the power of the market in a more open system of currency choice will mean that cryptocurrencies will hopefully play a vital role in forcing these politicized, centralized institutions to better manage their people’s money.

Federal Reserve image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Ex-FDIC Chair: Current Monetary Tools ‘Inadequate’, Fed Should Consider Digital Currency

The former Chair of the U.S. Federal Deposit Insurance Corporation (FDIC) said that she thinks the Federal Reserve (Fed) needs to seriously consider issuing a central bank-issued digital currency (CBDC) in a June 8 op-ed published on Yahoo! Finance.

In her op-ed, the former FDIC Chair Sheila Bair noted that “the past 10 years are proof positive that current monetary tools are woefully inadequate to stimulate broad-based economic growth,” adding:

“The super rich have gotten a lot richer, while the middle class has struggled.”

Bair first crosses out cryptocurrencies like Bitcoin (BTC) as a way to improve current monetary tools, noting that “unfortunately for M. Nakamoto [sic, anonymous creator of BTC], bitcoin has failed miserably as a method of payment.”

Bair then goes on to describe a hypothetical digital currency, FedCoin, that would be issued and backed by the Federal Reserve. Since FedCoin would be printed by the Fed, it would solve the problems of bank runs in times of financial stress, as “by definition, it [the Fed] can always make good on financial obligations.” According to Bair, the FedCoin could eliminate the need for checking accounts, and thus the costs of maintaining them, as well as reduce interchange fees charged by banks and credit cards for small firms.

However, Bair notes that a “wholesale shift from bank accounts to CBDC could have severely negative consequences for credit availability given banks’ reliance on deposits to fund loans.”

Explaining further, Bair writes that retailers could be so attracted by the lower cost of using CBDC’s that they could “prompt a different kind of run on banks, as fiat money quickly migrated out of deposit accounts into digital coins.”

Nevertheless, Bair writes that even though this new kind of bank run would be “very bad for the banking system, but also the Fed,” whose currency-issuing monopoly would be threatened, the Fed still “needs to get serious now about evaluating the relative merits of issuing its own digital currency”:

“If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.”

Countries around the world have begun looking into CBDCs as well: at the end of May, the Bank of England issued a working paper on central bank-issued digital currencies, and last week, Thailand’s central bank revealed it was considering issuing its own cryptocurrency.

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Money20/20: Central Bank Execs Conclude Crypto Is No Threat to Fiat, Yet

Representatives from multiple central banks discussed whether or not cryptocurrency could spell the end of fiat currencies during the Money20/20 conference in Amsterdam today, June 5.

During a panel talk titled “Cryptocurrency, the Central (Bank) Question”, representatives from the Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns responding to the question “Can cryptocurrencies spell the end of fiat currencies?”.

Bank of Canada executive James Chapman stated that cryptocurrencies are only a threat to fiat currencies in a “situation of hyperinflation”. Thomas Moser, an alternate member of the governing board at the Swiss National Bank, agreed with Chapman, adding that they are also a threat when a currency “is not performing well.” Moser also noted:

“As long as central banks do a good job, there is no real for central banks to disappear.”

Moser mentioned during the panel that “cryptocurrency is very well tolerated in Switzerland so far.” The country, and in particular its Zug “Crypto Valley,” has been touted by some as an attractive place for crypto companies, due to its balanced approach to Initial Coin Offerings (ICO) and its status as a crypto tax haven.

Martin Etheridge, Head of Division at the Bank of England, called the question of what a currency is and how important cryptocurrencies will be in society “totally relevant.” Addressing the question at hand, Etheridge said he doesn’t “see much prospect of the current iteration of crypto assets in replacing fiat currencies,” though he added “who knows what the future will hold.” He concluded:

“[But] I think the odds are stacked very much in favor of fiat currencies. I think it would take a pretty fundamental shift of public perception or the existing market system for it to happen.”

At the end of June, Bank of England governor Mark Carney said the bank was open to the idea of a central bank-issued digital currency, but added that the adoption of digital currency won’t happen soon and that cryptocurrencies are not currently considered money.

Dr. Marius Jurgilis of the Bank of Lithuania clarified that a central bank-issued cryptocurrency and a cryptocurrency are two separate things, adding that the main product of central bank is “a matter of trust”:

“If our product is good, we don’t need to talk about the cryptocurrencies. It’s a matter of trust […] but if the society starts questioning, or it if it thinks that the things we are selling could be got in a cheaper, more convenient way, other things will appear.”

However, Jurgilis did mention that the bank is not “sitting entrenched in our positions,” but that they are hesitant to let something in that “could lead to a major collapse of trust.”

In mid-April, Lithuania’s central bank reportedly began looking into cryptocurrencies, initiating a roundtable with members from commercial banks, government regulators, as well as crypto traders.

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Bank of England Explores Centralized DLT System Open To Regulatory Oversight

The Bank of England has released a Proof-of-Concept paper (PoC), together with Blockchain startup Chain, that examines how to configure a distributed ledger system which would maintain privacy between participants, keep data shared across the network, and also enable a regulatory body to oversee all transactions, as outlined April 11.

The paper investigates a scenario in which the DLT system includes a central authority (such as a central bank), a regulator, and several participants involved in the transfer of a hypothetical asset.

The central authority would have the power to issue and retire new units of assets and grant access permissions to all participants, and the regulatory authority would maintain oversight of all assets in the system. No party other than the regulator would be able to infer details about transactions they are not party to.

An attacker would have to obtain the private keys for each transaction in order to decrypt data, such as asset identifiers and transaction amounts.

The paper is for now academic, rather than practical. It raises the concern that although current cryptographic techniques are “theoretically” able to secure privacy between participants, whilst also keeping the data fully distributed, future cryptographic breakthroughs could retroactively compromise this and render the scheme vulnerable to attack.

In responding to the “trade-offs” between privacy, performance, and resilience, this PoC is different from alternative schemes which privilege privacy to the extent that data is only shared between those participants directly involved in a transaction. The paper nonetheless concludes by admitting that the cryptographic solutions which could offer an “ideal” balance between factors such as scalability, speed of transaction processing, and security risks, still require significant testing.

The paper comes days after the UK bank announced renewed plans to pursue its PoC for a DLT-compatible real-time gross settlement system (RTGS), which was first proposed in 2017. The statement struck a similarly reserved note, emphasising that DLT tech was not yet “sufficiently mature to provide the core for the next generation of RTGS,” but that it placed a high priority on expanding RTGS functionality to be capable of interfacing with DLT in the future.

A recent report released by SWIFT and 34 global transaction banks likewise emphasized the need for more DLT tech development to meet “industry-level governance, security and data privacy requirements,” yet struck an overall positive tone, urging the banking community to complement their platforms with DLT capabilities.

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Bank of England Eyes Regulatory Oversight of Private Blockchain Data

The Bank of England, the U.K.’s central banking authority, is developing a proof-of-concept (PoC) examining how to maintain privacy over a distributed ledger-based network while still allowing a regulatory overview of the data.

Partnering for the project with Chain, a blockchain startup that develops infrastructure protocols, the Bank of England released a paper on Wednesday setting out how it is exploring how to maintain a high level of data privacy among participants over a distributed network, while at the same time facilitating transactions of different financial assets.

The ideal scenario, as pictured by the central bank, would be to design “a distributed ledger system in such a way that transactions remain private whilst keeping all data shared across the network, and at the same time maintaining a regulatory view of all transactions.”

The PoC – which is aimed to build academic understanding, not as a practical solution – offers a window into the thinking of the U.K.’s central bank in advancing distributed ledger technology (DLT) development for existing business functions, while avoiding complete concealment of transactions from the authorities.

The paper comes just several days after the Bank of England released a plan to push a DLT solution as the basis for the next generation of its real-time gross settlement system, and for which the bank is currently testing a proof-of-concept.

That said, the primary difficulty, according to the central bank, is the scalability, which is one of the top trade-offs as the institution considers its move towards DLT system.

While admitting the ideal scenario is “theoretically possible,” the Bank of England stated that technology of cryptographic solutions which aim to protect privacy of data shared across the network is still at a very nascent stage.

“The trade-offs would still need to be further explored, especially with respect to scalability, speed of transaction processing and risks around the security of the cryptographic techniques employed,” the bank concluded.

Bank of England image via Shutterstock

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UK Financial Regulator To Release Crypto Review This Year With BoE And Treasury

The United Kingdom’s Financial Conduct Authority (FCA) will be publishing a review of cryptocurrencies this year in conjunction with the Treasury of the UK and the Bank of England (BoE), according to the FCA’s business plan for 2018/2019.

At the end of March, the Treasury of the UK had announced the creation of a cryptocurrency task force with the BoE and the FCA to look into how to both regulate and support crypto technologies. The FCA had also reported the release of a global fintech regulatory sandbox for testing fintech innovation without needing to wait for regulatory approval.

Under a section entitled “Cross-sector priorities,” the FCA details in their business plan how they plan to approach the speed with which fintech innovation is driving change in markets:

“Our approach is to sustain a regulatory environment where consumers and firms can maximise the opportunities of competition, innovation and big data while reducing or mitigating the associated harms.”

Cryptocurrencies are listed among the “key activities” of the FCA Innovate program, the FCA’s way of assisting firms with the regulatory guidelines in exchange for keeping up with new market trends like “initial coin offerings and distributed ledger technology.”

The FCA report reads that although cryptocurrencies “are not currently within our regulatory perimeter […] some models of use or packaging cryptocurrencies bring them within our perimeter, making the landscape complex.” The FCA also notes that they have already released guidelines for dealing with cryptocurrency derivatives, including futures, contracts for differences (CFD), and options.

The FCA will continue to monitor the “number of new entrants to the market and the emergence of new innovative products to meet consumer needs” as a way to see if fintech is helping “improve competition in the interest of customers.”

The question of how to regulate cryptocurrencies across the European Union has varied options put forward, with the BoE governor suggesting in March that the crypto ecosystem should be held to the same standards as the traditional financial system.

The chairperson of the European Banking Authority has said that prohibiting banks and financial institutions from holding and selling crypto may be easier than direct regulation of cryptocurrencies, while a draft of a G20 documents reads that the group may consider crypto as an asset rather than a currency.