By George Pickering*
For the past several years, one of the most consistent themes in the world of of central banking has been the ongoing drive to incorporate blockchain technology and cryptocurrencies into the central bankers’ tool kit. The mysterious potential of the blockchain has tempted central banks around the world into a wide range of experiments with the new technology, and in a previous Mises Wire article as recently as late-2016, I discussed the Bank of England’s plan to mint its own Bitcoin-style cryptocurrency for use in inter-bank payments. Although that plan has now been shelved for the foreseeable future, the general overhaul of the Bank of England’s payments systems has continued and moved in new directions, with attempts to incorporate distributed ledger technologies having now taken on a different character.
It was these attempts which led to the recent publication of a report which announced that, when it rolls out its new Real-Time Gross Settlement (RTGS) system, the Bank of England will break with established norms by allowing blockchain-based FinTech firms to access that system.
An RTGS system is a specialist funds transfer service which “ essentially forms the foundation ” of all of the activities of Britain’s central bank. The Bank of England’s RTGS system facilitates instantly-cleared, high-value transfers of money (usually central bank reserves) and securities between financial institutions, in order to maintain the liquidity of Britain’s financial system on a minute-by-minute basis. Britain’s RTGS system facilitates around half a trillion pounds worth of inter-bank transactions every day, a number equivalent to almost a third of the UK’s total annual GDP, with the money used in the system currently being comprised of around £300 billion of electronic central bank reserves, plus around a fifth of that amount in physical banknotes.
Access to the Bank of England’s RTGS system has previously been a special privilege of banks and other such traditional, large financial institutions. So why is the Bank of England now planning to open the system up to a new generation of tech startups based around the decidedly non-traditional payments system of the blockchain? The Bank of England’s report on its decision offers few clues to the underlying reasons for the shift, mainly concerning itself with vague and generic statements about the need to “meet the challenges posed by a rapidly changing landscape” by offering “a diverse and flexible range of settlement models, to enable existing and emerging payment infrastructures to access central bank money”. It is certainly true that Bank of England Governor Mark Carney has been adamant in his desire to modernise the Bank’s RTGS system, with the current “ambitious rebuild” representing one of the key endeavours of his tenure. But Carney himself could certainly not be described as an enthusiastic supporter of blockchain technology, and has been outspoken in his criticisms of cryptocurrencies in the past , viewing them as a largely criminal ‘Wild West’ of the modern monetary system, in dire need of the taming influence of civilisation.
However, this very distaste for the current state of the crypto-economy could provide some clues to the motivations behind the decision to bring blockchain-based firms into the fold. Aside from its role of controlling the British money supply and interest rates, the second most important function of the Bank of England is its role as the key regulator of Britain’s financial system. It is entirely possible that, by inviting these new blockchain-based firms into the Procrustean bed of ‘respectable’ British finance, the Bank of England is hoping to be able to extend its regulatory power over the newly emerging frontier of cryptocurrencies and distributed ledger technology. This interpretation seems to be borne out by a speech given by Carney on the subject of cryptocurrencies, this March. After decrying the supposed tendency of private cryptocurrencies toward debasement and use by criminals, Carney seemed to hint that appropriate controls could be placed on the growing blockchain economy by incorporating it into the mainstream financial sector, which Carney’s Bank of England regulates. “The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities.” Just two months after giving this speech, the Bank of England began running ‘Proof of Concept’ tests with a handful of blockchain-based FinTech startups — Baton Systems, Clearmatics Technologies Ltd, Token, and R3 — which led to this decision to allow blockchain-based firms access to the Bank’s RTGS system.
Another possible motivation behind the decision could be to extend the Bank of England’s influence over interest rates into the developing crypto-economy. When the Bank of England lends out central bank reserves to private banks, through the RTGS system, the borrowing banks have to pay the ‘Bank Rate’ of interest on those borrowed reserves, which is one of the few interest rates in the economy which the Bank of England actually directly controls. The greater the number of private banks who are, through the RTGS, made to pay the ‘Bank Rate’ of interest on borrowed reserves, the more the Bank of England is able to indirectly influence the constellation of other interest rates throughout the economy. This recent decision to give blockchain-based firms easier access to central bank reserves, by opening the RTGS system to them, could reflect the Bank of England’s desire to extend its influence over interest rates into the new frontier of crypto-based finance.
Regardless of the motivation, this recent decision represents only the latest development in central banks’ ongoing experimentation with distributed ledger technologies. If we wish to preserve the explicitly anti-statist intentions of the founders of the modern crypto-economy, special attention must be paid to how states and their monetary Tzars attempt to grapple with the blockchain and its implications in the future.
About the author:
*George Pickering is a 2018 Mises Institute Research Fellow and a student of economic history at the London School of Economics.
This article was published by the MISES Institute.