The Bank of England recently announced that it will not be pursuing plans to introduce its own Bitcoin-style cryptocurrency in the near future. Speaking at the CREST Twentieth Anniversary Conference on 20th September, the BoE’s executive director for banking, payments, and financial resilience, Andrew Hauser, confirmed that “there is no likelihood of such an extreme revolution occurring any time soon.” The announcement was prompted by speculation following a recent consultation paper published by the Bank, which suggested that Bank stakeholders had agreed that the creation of such a cryptocurrency would be the “blueprint for the next generation of real time gross settlement systems (RTGS).”
A RTGS is a specialist funds transfer system traditionally operated by central banks, which “essentially forms the foundation” of everything the Bank of England does. It allows for high-value transfers of money or securities to be made between banks, and be settled instantly. The system is considered to be vital to keeping the banking system liquid and dynamic on a minute-by-minute basis. The current RTGS arrangement facilitates over half a trillion pounds worth of inter-bank transactions within the UK financial sector each day, a number equivalent to almost a third of the UK’s annual GDP. As things stand, the Bank of England’s RTGS system operates with a stock of £300 billion of electronic central bank reserves, and around a fifth that amount in physical bank notes.
Through its role in easing inter-bank lending, the RTGS is also vital to the Bank of England’s role in manipulating interest rates and enacting quantitative easing. By helping the central bank to lend reserves to other banks on an enormous and rapid basis, the RTGS amplifies the importance of the Bank Rate of interest paid on those reserves. The Bank of England’s Monetary Policy Committee, who set this Bank Rate, is thus afforded enormous power to influence interest rates and inflation throughout the economy. The RTGS system also bolsters the BoE’s ability to conjure money out of thin air and rapidly distribute it to private banks. This allows for inflation of the money supply and quantitative easing at a rate and scale which would be impossible otherwise.
So why was the Bank of England considering the introduction of its own crypto-currency, to use within its real time gross settlement system? After all, the novel technological features of private cryptocurrencies like Bitcoin have been popular largely because they have allowed users to more easily escape the strictures of the state-controlled economy, which central banks are at the very heart of. Ironically however, the central bankers are now hoping to strike back by harnessing the very same technologies and putting them in service to their own machinations. Inspired by the decentralised public ledgers used to run blockchain-based cryptocurrencies, central banks have theorised that a modified “distributed ledger” technology could enhance security and speed up settlement times within the RTGS.
If the recent consultation papers and proofs-of-concept put out by the Bank are indeed correct, and a distributed ledger cryptocurrency would benefit and strengthen central banks’ RTGS systems, then the opponents of the central banks’ influence over the world economy should certainly be concerned. Such strengthening of the central banks’ ability to manipulate interest rates would only fuel and accelerate the banks’ already dangerous power to create inflationary bubbles and busts throughout the world economy. Furthermore, the technology would allow central banks to entrench themselves and their methods even more deeply into the world’s economic framework, making the prospect of their eventual abolition seem even more distant. In June, Bank of England Governor Mark Carney ominously emphasised, in the transcript of a cancelled speech, that the technology would better allow the RTGS system to remain active even under circumstances of extreme disruption and turmoil in the financial system. “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.” If the BoE is right, and the introduction of its own cryptocurrency would indeed allow faster and more secure injections of easy money through the financial system, then the next generation of central bankers could find themselves wielding a degree of power beyond the imaginings of their predecessors.
In light of this then, the Bank’s recent announcement that it will not be pursuing this course in the near future should come as a relief. Unfortunately however, it can be expected that central banks around the world probably will eventually implement such changes. Not only have they invested significant time and resources into investigating these ideas already, with those investigations resulting in largely positive expectations, but also because several central banks have already begun to make steps in that direction over the summer and early fall of this year. While researchers at the Bank of England have been amongst the most aggressive and vocal in exploring potential applications of the new technology, the Bank of Canada appears already to be preparing similar plans for implementation. The Canadian central bank revealed this June that it, in partnership with several other major Canadian banks, was developing a blockchain based digital equivalent to the Canadian dollar, called CAD-coin. It is worth watching for developments in these plans over the next few months, as they may well provide an insight into what the future of central banking might look like.
George Pickering is a student of economic history at the London School of Economics.
