The internet led to cloud computing, smart technology, and now another revolution - cryptocurrency. Our world is digitally evolving, and the blockchain technology at the heart of cryptocurrency has the potential to change our future.
Cryptocurrency, such as Bitcoin, is a medium of exchange which is electronically created and stored, using encryption to control the creation of monetary units, as well as verify the transfer of funds. Not all media news surrounding cryptocurrency has been positive and its use in illegal activities via the Dark Web has been made well-known.
Regardless, the industry has been maturing, and established financial institutions have been working together to develop distributed ledger technologies e.g. the R3-led blockchain consortium.
While some countries have explicitly allowed the use and trade of cryptocurrencies, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified cryptocurrencies differently.
Presenting Virtual Currencies and Beyond: Initial Considerations at the World Economic Forum, Christine Lagarde, director of the International Monetary Fund spoke of blockchain’s potential to become a powerful tool for deepening financial inclusion. While the report praises the benefits and innovations of cryptocurrency, the UK Government would have to adopt a balanced regularly framework in order to encourage its widespread use across the nations.
The Bank of England (BoE) has been looking closely at cryptocurrencies, and even published papers on the subject. Like a number of central banks, the BoE is looking at the possibility of using such currencies.
A UK central bank digital currency may provide the following benefits:
- Reducing costs incurred during the issuance and circulation of traditional fiat currencies;
- Increasing in the transparency and convenience of economic transactions;
- Curbing the effect on tax evasion, money laundering and other criminal acts;
- Improving the BoE’s control over the money supply and circulation.
For the market to reach the next phase in its evolution toward nationwide acceptance, each of the five key participants - consumers, merchants, technology developers, investors, financial institutions, and regulators will have to play a role. For example:
- Regulatory frameworks and their impact will need to be discussed;
- Proposed designs will need to be assessed, e.g. using economic safety and service factors
- Development of the technology platform will need to link domestic and international financial institutions.
On Tuesday 19th July 2016, the House of Lords Economic Affairs Committee took evidence from the BoE’s Deputy Governor, academic experts and financial services professionals. They explored the prospect of a central bank digital currency, the effect it could have on commercial banks, risks to financial security, industry impact, applications for government services (such as tax collection), and cryptocurrency security.
Ben Broadbent, the Deputy Governor for monetary policy at the BoE, discussed both the concept of a central bank issuing digital currency – which he indicated is an evolving, years-long process – as well as the technology’s broader impact on financial markets.
Broadbent went on to frame the conversation about blockchain within a broader question of how financial markets should be structured at all, telling committee members:
“When you think of things on these scales, the benefits are clear and quite large, and so are the costs. And what I was really trying to say is, even though this is a very new technology, I think it's possible, once you think through, to realize that some of the big questions involved are very old, not to say ancient.”
Broadbent dismissed the idea that the BoE would use a similar model to Bitcoin, indicating that any network, if it came to fruition, would be a permissioned one.
There are two main types of blockchain technology:
- Permissioned (also known as, 'distributed ledgers' or 'replicated shared ledger')
An Unpermissioned blockchain is an open, decentralised ledger which records the transfer of value. Every transaction is cryptographically chained to the previous transaction. The result is a permanent, unchanging and verifiable record of truth which everyone can see. This is useful when no central entity is available to verify a transaction.
This form of blockchain is resistant to censorship. Amendments cannot be made. If you want to record a statement of fact inclusive of your name, (e.g. Annabel would like to pay Pete £100" or "This is my last will and testament"), Unpermissioned blockchains are a great way to do this.
In contrast, a Permissioned blockchain would be owned by the banks, operated only by vetted players/authorities, and include oversight from regulators. This is the opposite of Bitcoin's unpermissioned blockchain, whereby any individual anonymous user can join and contribute hash-power to verify transactions without having to ask anyone’s permission.
Dr. Catherine Mulligan, Research Associate Director of Imperial College Centre for Cryptocurrency, told the Committee:
“There are, really, a number of profound issues that need to be looked at from a regulatory perspective, and also these kind of moral and ethical questions, it raises them, very large questions for our society if we wish to use these technologies.”
Broadbent told the panel that an electronic central currency remains "a long way off," both due to technological barriers and the fact that it would involve major restructuring of the entire financial system.
“If you are talking about an all-singing, all-dancing central bank digital currency, replacing not just the liabilities we currently handle, but prospectively substituting it for commercial money then yes, that is a long way off. That is not just about technology; that would be a matter for the shape of the financial system.”
Technological, regulative and legislative barriers are currently holding back the establishment of a system for issuing and circulating a digital currency. Going forward, addressing these barriers can help the U.K. to build an entirely new infrastructure, further improve U.K. payment systems, improve payment and settlement efficiency, and promote increased overall economic quality.
Rajinder Tumber is a cybersecurity specialist and has been nominated for awards within both the cybersecurity industry and The Chartered Institute for IT