As mentioned last week, the House of Lords gathered a number of leading people to discuss blockchain and its potential to develop a digital currency for the UK. Brave New Coin summarises the whole affair nicely, and I want to keep this for the record, so have copied their update over here.
House of Lords told Bank of England’s digital currency is ‘some way off’
On Tuesday July 19, in the Palace of Westminster, the 13-member Economic Affairs Committee of the United Kingdom’s House of Lords took evidence from the Bank of England (BoE), academia, and industry experts during a “one-off inquiry into distributed ledger or blockchain technology.”
The committee’s main function is to examine matters that Parliament ought to be concerned with, and report recommendations for government action to the House of Lords.
The 3-hour long inquiry was split into three sessions. The Committee first heard about the Bank of England’s current research on the blockchain technology.
The Bank of England’s Deputy Governor of Monetary Policy, Dr. Ben Broadbent, explained that there are two broad parts of the BoE’s blockchain research program; the economic aspect, such as when using the technology for payments, and what companies are doing with the technology. The latter is also one of the main reasons behind the Bank’s new FinTech Accelerator program, which aims to promote and understand innovative technologies like blockchains.
“The FinTech Accelerator deploys innovative technologies on issues that matter to the Bank’s mission and operations.”
– Bank of England
Emphasizing that blockchain technology is in its infancy, Dr. Broadbent declared that “its implication is far from clear at the moment.”
It did not take the Committee long to start directly questioning the status of the country’s digital currency. Four minutes into the inquiry, the Chairman of the Committee, Lord Hollick, probed Dr. Broadbent following his ‘infancy’ comment, questioning: “The prospect of a digital currency is, in your views, some way off?”
Dr. Broadbent confirmed that, if by digital currency “one means central bank digital currency replacing, not just the liability we currently have, but perspectively substituting for commercial bank money then yes I would say so.”
He explained that the Bank is exploring other uses of the technology, such as settlements. However, there are obstacles other than just the technological, he elaborated.
Dr. Broadbent then mentioned something he had said before, in a speech at the London School of Economics in March. Briefly discussing the differences in the roles of central banks and commercial banks, he talked about how central banks could soon compete with commercial banks for deposits.
Lord Forsyth of Drumlean then brought up how the private sector has shown interest in the technology for clearing and settlement, citing that estimated improvements could save $16 billion a year.
Dr. Broadbent suggested that in the grand scheme of things $16 billion is small but likely a reasonable estimate. He added his expectation that different alternatives of distributed ledger systems will, at first, compete. In the long term, there are benefits to having a single standard platform.
When asked by Lord Forsyth of Drumlean whether this new technology has enough processing capacity to support the world’s entire payment and settlement systems, Dr. Broadbent took the time to explain Bitcoin, citing that the energy involved in Bitcoin “is material.”
“Bitcoin is what’s called a permissionless system. Anyone can join, anyone can transact. It’s entirely anonymous. And, in order to verify transactions when you have absolutely no idea who the people are […] there is a lot of checkings that need to be done.”
– Dr. Broadbent
He explained that Bitcoin uses the proof-of-work model, which is relatively energy intensive. However, a permissioned system where participants are known to each would not need this degree of verification. It can, therefore, handle a much higher volume of transactions.
The first session wrapped up after some discussion about how the central bank’s digital currency would work in replacing the existing system, such as loans and mortgages. Dr. Broadbent concluded that they should be very different from the way they are now.
The second session consisted of three witnesses; Professor Michael Mainelli of Gresham College, Dr. Catherine Mulligan, of Imperial College Centre for Cryptocurrency Research, and Lord Spens, Transformation and Assurance Director of PricewaterhouseCooper (PwC).
Lord Hollick opened the session with a question about industries being disrupted by blockchain technology, and how disruptive those changes are. Professor Mainelli named electricity transmission, insurance, shipping, health, media, and identity systems as being the most affected. Dr. Mulligan added government as well as local authorities to the list.
“There is a lot of opportunity in intra-central bank.[…]I think that’s where the low-hanging fruit is.”
– Dr. Mulligan
After discussing the security aspect of blockchain technology in some detail, this session ended with Lord Tugendhat asking about the risks and benefits of using blockchain technology to create a central bank digital currency.
PwC’s Spens immediately replied that “The opportunity would be you can remit money overseas instantaneously.” Professor Mainelli added that there would be macroeconomic advantages,“For the first time, we can know the velocity and quantity of money. We have never known that.” Mainelli then explained the ability to implement novel forms of taxation, and gave a few examples.
In the final session, the Co-Founder and Director of Blockchain at 11:FS, Simon Taylor, and the Chief Executive Officer of Digital Asset Holdings, Blythe Masters, were heard. While Taylor was present to address the Committee, Masters attended via speakerphone, and was sometimes difficult to hear.
Lord Hollick opened this session by first asking Masters to explain her analogy of blockchain being similar to email. Masters proceeded to explain the basics of how blockchains work.
When singled out to answer what the government should not do, Taylor replied “don’t rush to standardize,” and warned about the problems from over-regulation. He added that the technology is in its very early stages, and his belief that the government should do anything it can to encourage it. He further suggested letting the industry experiment with the technology for 18 months to two years without introducing any regulations or standards.
Taylor described how blockchain technology and smart contracts can be use as part of the current systems’ upgrade, and not a total overhaul. He then cited that many organizations, such as the Depository Trust & Clearing Corporation (DTCC), Euroclear, and Clearstream are already exploring using this technology alongside their existing systems.
“Any change in an incumbent organization is very difficult when you’ve got millions of customers and a legacy IT.[…]I think the reality is you have to start running it alongside your existing processes.”
You can watch the whole discussion if you like. The show starts after about a minute.