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Saturday, 10 March 2018

Carney's crypto crackdown (FT)

"When the governor of the Bank of England speaks, markets take note. When he talks about cryptocurrencies then it’s pens-down time for us all.

Most of the attention, understandably, on Mark Carney’s speech on Friday focused on his calls to bring parts of the crypto ecosystem into the “regulatory tent”.

So far, so predictably central-bank governor. But it was a sweeping and surprisingly nuanced speech on the history of money, whether cryptos will replace money [spoiler alert: he says they won’t] and how policy makers and regulators should approach digital currencies. You can read the full speech here and my news story here.

But worth further examination are his comments around blockchain, or the distributed-ledger technology that underpins cryptos. One of the reasons Mr Carney doesn’t think a crypto ban would be useful is because he argues it would stifle potentially useful innovation that could be harnessed in wider ways for the public good.

It’s long been known that the BoE has been examining uses of DLT. It’s one of the most avant-garde central banks in that regard (although perhaps not as revolutionary as Venezuela, the only country so far to attempt a central-bank digital coin with its “petro” offering two weeks ago).

The Old Lady of Threadneedle Street even looked at whether its £600bn-a-day settlement system, RTGS, could run on DLT. For now, that plan has been shelved because, Mr Carney says, the technology is just not up to it.

But that is not to dismiss it, nor the wider change afoot that has made cryptocurrencies wildly popular over the last couple of years.

“Even if the current generation [of crypto-assets] is not the answer, it is throwing down the gauntlet to the existing payment systems,” Mr Carney said. “These must now evolve to meet the demands of fully reliable, real-time, distributed transactions.”

People increasingly consume, work and operate in communities, the thinking goes, yet traditional banking and payment services operate on a hub-and-spoke model.

Using the community idea familiar to many crypto users as a model, Mr Carney reckons there could be an overhaul in how we interact with government or public agencies – think paying our tax, managing our medical records, or even buying a house. Mr Carney explicitly highlighted how DLT might expedite the stamp-duty process (proptech entrepreneurs, take note).

Securities settlement is another obvious area ripe for change with the assistance of DLT, and Mr Carney is right to highlight that while it takes a nanosecond to execute a trade, it can still take days to settle.

“That’s why the Bank is building the new RTGS so that new forms of securities settlement that meet our standards of resilience (including those using distributed ledger) will be able to plug in directly,” he added.

As an aside, the BoE is allowing non-bank payment-service providers to access RTGS directly. The first PSPs are expected to do so in a matter of weeks. That should help lower transaction costs for everyone.

Joanna Torode, a London-based lawyer at Ropes & Gray, says: “Appropriate and thoughtful regulation will facilitate the better exploration of the opportunities that blockchain offers to the financial services and technology sectors in London, in particular the thriving London fintech market, particularly post-Brexit.”

So in the same way as the BoE has been forced to be more nuanced in how it thinks about cryptos, maybe the crypto community should be more nuanced in how it thinks about the BoE: regulation may herald a legitimisation that in turn could bring even wider adoption."

Source: FT #fintech weekly newsletter of 2 March 2018

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