Bank of England Says Central Banks Consider Using Blockchain Technology [CoinSpeaker]

The Bank of England has recently stated that central banks consider implementing “hybrid systems” involving distributed ledger technology of the type currently used to record Bitcoin transactions.

“There is more than one way in which a distributed ledger system can work, and remuneration would have to be designed in such a way as to incentivise honest participation in the system without leading to socially inefficient over-investment in transaction verification,” the Bank of England stated.

Representatives of the Bank of England said that further research would also be required to devise a system that could utilize distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.

As known, Central banks are the governors in terms of regulation and have a mission to ensure financial stability throughout the system.

Central banks are alive to potential scale of disruption visited upon them by money over IP and are even looking at use cases whereby they might issue digital currencies. The preferred option for them would be to stay in charge of the basics of the flow of money of all stripes through the financial system.

“The first question is whether a protocol for a central bank issued digital currency could be developed at all,” the Bank of England stated meaning that regulatory control is the armor central banks will advance with.

“Creating such a system would entail creating a protocol for value transfer over the internet, akin to what Berners-Lee (1989) did for information. Firms offering digital currency services, such as wallets or currency exchange, would operate on top of the platform, raising the question of how they should be regulated. As they would not be offering to hold funds on their own account, the prudential regulatory issues would probably be different from the conventional focus on capital and liquidity requirements at existing banks.”

As said by the Bank of England, conduct issues, particularly those relating to know your customer (KYC) and anti-money laundering (AML), would also have to be addressed by such companies. Further research would also be required into how digital identity management could be achieved while balancing privacy considerations.

It appeared that this is not the first time of banks showing interest in blockchain technology.

In June this year Santander InnoVentures, in collaboration with its partners Oliver Wyman and Anthemis Group, has released “The Fintech Paper 2.0″ research that states that using blockchain technology could allow banks to save as much as $20 billion.

“We have internally identified 20 to 25 use cases where this technology can be applied,” Mariano Belinky, head of Santander InnoVentures, told during MoneyConf in Belfast on June 15-16 this year. “We are very excited about distributed ledgers and blockchain technology. They really have the potential to disrupt many of the basic processes we have underlying our transactional products.”

“The first major application is being seen in payments. International payments remain slow and expensive and significant savings can be made by banks and end-users bypassing existing international payment networks,” the research indicated.

Banks could make use of the blockchain instead of having to rely on clearing houses to verify transactions. The blockchain system provides better efficiency and transparency compared to the regular approach.