Due to the murder of UK Labour MP Jo Cox, Bank of England Governor Mark Carney cancelled his speech called “Enabling the FinTech transformation: Revolution, Restoration, or Reformation? ” that was to have been given at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, London on June 16, 2016.
In a transcript of the cancelled speech Carney cited a “central bank digital currency” as a development that could result from its ongoing distributed ledger proof-of-concepts.
“The ledger, once stone, wood, or paper – and always centralised – is now digital and may become distributed. FinTech has the potential to deliver more resilient financial infrastructure, more effective trade and settlement, and new ways to encode, share and analyse data.”
“For the financial sector, these could offer shorter, speedier transaction chains; greater capital efficiency; and stronger operational resilience. For consumers, they could mean more choice; better-targeted services; and keener pricing. For everyone, FinTech may deliver a more inclusive financial system, domestically and globally; with people better connected, more informed and increasingly empowered.”
“These benefits spring from FinTech’s potential to deliver a great unbundling of banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital. This would mean revolution, fundamentally re-shaping the financial system. At the same time, some financial technologies could make incumbent banks more efficient and profitable, reinforcing existing economies of scale and scope in banking. This would mean a restoration, reinforcing incumbents’ power. The balance of these forces may yield a third alternative – a reformation – a more diverse, resilient and effective system for consumers. One where large banks exist alongside new entrants who compete across the value chain.”
Carney welcomed the fact that FinTech innovators are exploring the potential of distributed ledger technology to simplify the settlement chain, reduce its cost, and raise its speed while increasing resilience.
“If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?”
“The great promise of distributed ledgers for central banks is their potential to enhance resilience. Distributing the ledger means multiple copies of the system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system.”
“”But if we are to entrust the heart of our financial system to such technology, it must be robust and reliable. The payments system we oversee processes £½ trillion of bank transactions, equivalent to around 1/3 of annual GDP, each day. Disruptions are potentially costly. That is why, in payments and settlement, the Bank has an extremely low tolerance for any threat to the integrity of the economy’s ‘plumbing’. “
“To help distinguish DL’s potential from its hype, the Bank has set up our own as a Proof of Concept. We have learned a great deal – about the opportunities and the challenges that need to be met before DL could be used in central banking.”
“To move forward we are working with other central banks. Beyond this we are open to working with others to explore further possibilities, including alternative applications of the technology.
“In the extreme, a DL for everyone could open the possibility of creating a central bank digital currency. On some levels this is appealing. For example it would mean people have direct access to the ultimate risk-free asset. In its extreme form, it could fundamentally and perhaps abruptly re-shape banking.”