Bank of England Deputy Governor Cunliffe on DLT Securities Management: Not Fast!

There’s more to it than just assets, Bank of England Deputy Governor Sir John Cunliffe reminded the Financial Markets Association in London on September 28. The distributed ledger technology (DLT) behind crypto assets has huge implications for traditional markets. and interaction.

As DLT integrates with capital markets, it will address trading, clearing, depositing and custody, Cunliffe said. One of the biggest differences Cunliffe has identified in DLT is its speed. Quick settlement can reduce risk by eliminating the possibility of extreme market movements when trading, but:

“Rapid settlement development poses challenges for rapid management as it requires all funds and collateral to be in place at the time of business start-up. […] Although I think so [settlement] It doesn’t have to be fast or decentralized.

Smart contracts combine activities and reduce the number of intermediaries and the fees associated with them, Cunliffe said. For the same reason, they increase resilience in the system and may include related services such as coupon payment on bonds or “more sophisticated securities business management”.

Cunliffe, a longtime advocate of crypto regulation, had several caveats to share. First, DLT is relatively unproven. Additionally, decentralization may need to be limited:

“If there is no legal entity that is responsible for the service provided and responsible for the correct operation of the system, it is very difficult to see how to manage risks to the right level.”

Currently, “central banks provide the rails on those [settlement] Assets will be transferred regionally,” Cunliffe said, and the Bank of England could create its own DLT to handle future transactions, or create ways to “plug” existing real-time general settlement systems into DLT systems. Fabio Panetta, a member of the European Central Bank’s executive board, discussed similar options at a symposium on September 26. .

Related: BoE official compares current crypto market regulation to ‘unsafe planes’

The Bank of England, the Financial Conduct Authority and HM Treasury will have a Financial Market Infrastructure (FMI) sandbox by 2023 to examine performance and regulatory issues, Cunliffe said.