Last year the Bank of England published research suggesting that a digital currency issued by a central bank could generally make monetary policy more efficient and boost economic growth and aid financial stability. It was reported this week, that the Bank of England has been investigating and could approve its own bitcoin style digital currency, linked to sterling.
If they go ahead, a revolutionary shake up of retail high street banking could follow. The Bank has already carried out a successful test of new digital payment methods called ‘distributed ledger’ or ‘blockchain’, the technology that underpins bitcoin. It revealed the viability of making payments between two central banks and how it would make it far easier for central banks to control money supply and allow the bank to know how much money was in the economy at any given time.
In March 2016 news was reported that computer scientists at University College London had devised a crypto currency known as the ‘RSCoin’ with backing from the Bank of England.
The Bank of England are not alone, a model for this is emerging in the private sector.
Many of the biggest banks in the world are showing they are not immune from cryptocurrency euphoria. There are a range of projects in hand exploring how traditional financial firms can benefit from the innovation.
UBS, the Swiss banking giant, and ten other companies have said they plan to use the technical idea behind bitcoin, blockchain, for their own digital currency (paywall), paving the way for the world’s biggest central banks to do the same. This project is far from complete with a limited launch expected to take place by the end of next year. However, the momentum behind it suggests that cryptocurrencies are set to enter the mainstream.
The ‘utility settlement coin’ project started by UBS and Clearmatics Technologies in 2015 has lately been joined by Barclays and HSBC. The idea is to develop a new streamlined payment mechanism for institutional purposes, potentially replacing clearinghouses and other back office firms sitting between the buyers and the sellers of assets.
UBS Group are hoping that they will come up with something faster, cheaper and more reliable than existing systems. Each settlement coin would represent flat currency like euros and dollars on a one to one basis, and would thus be 100% backed by collateral at the domestic central bank. The idea is that exchanging the digital currency as payment for assets will be a more efficient means of exchange. Because the digital coins will be backed by cash at a central bank, which cannot default (they can always print money if they have to), the crypto tokens are free from credit risk.’
The promise of blockchain technology, say UBS is that transfers and ownership could be settled instantly.’
Questions still remain however, such as whether the technology could handle the necessary volume for the sale of institutional markets run by big banks. Whilst bitcoin was developed to cut out middlemen from such centralised institutions such as central banks, from Washington to Beijing, World Central Banks are exploring the possibilities of issuing their own digital currencies.
The Bank of England believes it could use the technical ideas to stimulate the economy. Right now, blockchain and cryptoassets appear to be one of the industry’s preferred new inventions, indicating that it is a long way off making mainstream finance obsolete.