On 24 March 2022, the Bank of England (in the name of its Financial Policy Committee) published a paper on the potential risks of cryptoassets to UK financial stability. While the risks are currently considered to be limited given the small size of the cryptoassets and associated markets relative to the global financial system, the FPC notes that the rapid growth of the crypto sector and potential for interconnections with the wider financial system mean that they will present financial stability risks in the future.Read More
By Rizwan Qayyum
A researcher at the Bank of England (“BoE”) recently explored the notion and technological requirements of a central bank issuing a digital currency (“CBDC”) and posited it may not be necessary to use distributed ledger technology (“DLT”) for the currency.
The Bank of England has widened access to the United Kingdom’s interbank payments system to increase competition by FinTech providers. The Bank announced on 19 July that a new generation of non-bank payment service providers (PSPs) will now be eligible to apply for a settlement account in the Bank’s Real-Time Gross Settlement (RTGS) system. The RTGS system has traditionally held the accounts of financial institutions in order to promote inter-bank settlement. Holding their own settlement account at the Bank will enable these non-bank PSPs to apply, for the first time, for direct access to the UK’s sterling payment systems that settle in sterling central bank money, including Faster Payments, Bacs, CHAPS, LINK, Visa, and, once live, the new digital cheque imaging system.
On July 10, 2017, the Bank of England (the “Bank”) published summaries of their third round of Proofs of Concept (“PoC”), completed by its FinTech Accelerator.
The FinTech Accelerator was established in 2016, and works in partnership with firms to understand the new technology they may be working with and how FinTech innovations could be utilised within central banking. These PoC provide valuable understanding in respect of FinTech trends and support to its continued development by providing a platform for those firms to demonstrate their solutions for real issues and knowledge from BoE experts.
The Bank of England’s FinTech Accelerator launched a new community on 17 March 2017 which brings together FinTech-related organisations. The community has three aims: to share developments, trends and insights; to make sure the Bank is engaging with different FinTech firms from across the sector; and to enable firms with an interest in FinTech to network, supporting the development of the sector. Community members will be invited to meet the Bank two to four times a year to share updates on trends and developments in the sector. The Bank will also hold quarterly networking and knowledge-sharing events, and publish summaries of the topics discussed. The list of initial community members is here. Summaries of the topics discussed at these events will be made available afterwards via the Accelerator’s website.
The Bank has also decided on the firms it will be working with for the third round of its Proofs of Concept (PoCs):
- MindBridge AI: MindBridge’s AI (artificial intelligence) auditor detects anomalies in financial transactions and reports using data science, machine learning and artificial intelligence. The Bank is using this PoC to explore the benefits of machine learning for analysing the quality of regulatory data input.
- Ripple: The Bank is carrying out a PoC with Ripple to demonstrate the synchronised movement of two different currencies across two different real-time gross settlement systems. The aim is to show how this kind of synchronisation might lower settlement risk and improve the speed and efficiency of cross-border payments.
Victoria Cleland, Director for Banknotes and Chief Cashier of the Bank of England, gave a speech on FinTech issues on 8 September (see the speech here).
Of particular interest were Ms Cleland’s remarks on the Bank’s long-term research on the wide range of questions posed by the potential of a central bank-issued digital currency (CBDC), including whether a CBDC would be feasible and whether it would benefit the economy and the financial sector, over the medium term. To support its research, the Bank has invited contributions to a set of research questions on the opportunities and challenges that could arise from the introduction of CBDC (see the questions here).
In remarks that were rather overlooked in the run-up to the Brexit vote in June, Mark Carney, the Governor of the Bank of England, talked on several FinTech topics. He mentioned five ways the Bank is enabling the FinTech transformation:
- Widening access to central bank money to non-bank Payments Service Providers
- Being open to providing access to central bank money for new forms of wholesale securities settlement
- Exploring the use of Distributed Ledger (DL) technology in the Bank’s core activities, including the operation of Real-time gross settlement systems (RTGS)
- Partnering with FinTech companies on projects of direct relevance to the Bank’s mission
- Calibrating its regulatory approach to FinTech developments
On 17 June 2016 the Governor of the Bank of England announced that the Bank is launching a FinTech Accelerator to work in partnership with FinTech firms to harness innovations for its own requirements as a central bank. In return, it will offer firms the chance to demonstrate their solutions for issues facing policymakers. The Accelerator will deploy innovative technologies on issues that matter to the Bank’s mission and operations. The Accelerator will appoint FinTech firms to run short Proof of Concept (POC) projects in a number of priority areas.
Some examples of current projects:
- BitSight: Uses publicly available bulk data to assess firms’ cyber resilience, including looking for evidence of malware on a firm’s systems, signs of known software vulnerabilities, or weak encryption, which can be used to form a view on the information security of a firm over time. For the POC, the Bank’s own resilience will be evaluated.
- Privitar: Provides tools to anonymise and desensitise data. The Bank will first test this software on a manufactured dataset to examine the analytical value of the desensitised data. It will then look to assess the capability of the tool on data held internally to establish if this will allow the Bank to provide wider access to data for researchers within the Bank.
- PwC: Understanding the technology of blockchain and distributed ledger, working with PwC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled the Bank to better understand the resiliency benefits and practical limitations of the technology.
The Bank is interested in new ways of structuring and analysing large data sets and data gained in regulatory reporting. Other areas of interest are around machine learning, particularly in relation to anomaly detection and pattern recognition. The Bank would welcome expressions of interest or proposals for the Bank to participate in, or act as a silent observer or partner with an existing pilot distributed ledger network. Pilots should test how the technology functions in ‘real world’ scenarios.