The Bank of England is testing blockchain tech to support domestic payments

The Bank of England said last week that it’s currently working on a “proof of concept” to see if its real-time gross settlement (RTGS) service will benefit from blockchain technology. The bank’s governor, Mark Carney, revealed the plans in April 2017, saying that securities settlements need innovation, and blockchain technology – aka distributed ledger tech – could produce “significant” gains regarding platform stability, efficiency, accuracy, and security. 

Real-time gross settlement systems are means for transferring money from one bank to another. The “real-time” aspect means there’s no annoying waiting period once your funds now reside at the recipient bank. Meanwhile, the “gross” aspect defines a one-to-one transaction and does not include transactions from other accounts. Finally, the “settlement” term simply means the transaction is final and cannot be reversed. 

Typically, a blockchain relies on a network of computers spread out across the globe supporting a database, aka the ledger, based on cryptography. This ledger stores transactions but is incapable of linking to specific individuals due to its cryptographic nature. Every transaction has a unique key and is stamped by a trusted party. That key is then stored with the next transaction, which is itself encrypted using a cryptographic formula. Rinse and repeat, and you have a chain of transactions that can’t be altered without modifying all previous transactions. 

“Although the Bank has concluded that Distributed Ledger Technology (DLT) is not yet sufficiently mature to provide the core for the next generation of RTGS, it places a high priority on ensuring that the new service is capable of interfacing with DLT as and when it is developed in the wider sterling markets,” the Bank of England reports. 

That’s where the proof of concept comes in. The bank is now working with Baton Systems, Clearmatics Technologies Ltd, R3, and Token, who now have access to the proof of concept: a cloud-based system that replicates a version of its pre-funded net settlement that could eventually serve U.K. retail payment systems. Those involved with the proof of concept will explore the best way of interfacing with the platform and how to better expand the RTGS service. 

Blockchain technology was first described in 1991 by Stuart Haber and W. Scott Stornetta. But it didn’t become a more common term until the arrival of Bitcoin, which uses a public blockchain/ledger to store all Bitcoin-based transactions. But the bank’s use of a blockchain doesn’t mean it will rely on a public ledger maintained by millions of PCs across the globe. This blockchain will likely be maintained by the bank itself and all other organizations accessing the platform. 

“The Bank of England has set out its vision for a renewed RTGS service that will deliver a materially stronger, more resilient, flexible, and innovative sterling settlement system for the United Kingdom to respond to the rapidly changing payments landscape,” the bank says. “The renewed service will offer a diverse and flexible range of settlement models.” 

The Bank of England will publish a summary of its proof of concept findings later in 2018.