‘Bitcoin and Blockchain Could Revolutionise Payment System,’ Says Bank of England

The Bank of England issued a research, which discusses the possibility of central bank creating its own cryptocurrency.

Photo: Percy Clarke/Flickr

Photo: Percy Clarke/Flickr

Digital currencies have a potential to change the payments system by enabling people making direct transactions without banks’ participation, the Bank of England stated in its new study.

The central bank has conducted an extensive analysis on the topic of central banking, including an overview of the virtual currencies and their possible impact on the financial industry.

“The emergence of private digital currencies (such as Bitcoin) has shown that it is possible to transfer value securely without a trusted party,” the discussion paper reads.

“While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise. This raises the question of whether central banks should themselves make use of such technology to issue digital currencies,” the bank also said in its report.

According to the Bank of England, the use of bitcoin will allow users making payments without third parties being involved. However, embracing the digital currencies can present some risks for banks. That’s why a set of regulatory, economic and technological issues must be analyzed before integrating the cryptocurrency.

“Further research would also be required to devise a system which could utilize distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack,” the report reads.

The bank also said that it is necessary to investigate how using the digital currencies will influence traditional banking systems, as clients moved towards keeping the cryptocurrency, rather than depositing it.

The new technology should not compromise the bank’s “ability to control its currency and secure the system against systemic attack.”

The question arising is whether it is possible to develop a protocol for the digital currency, as it would require the engagement of the technology as well as financial sectors.

“Creating such a system would entail creating a protocol for value transfer over the internet, akin to what Berners-Lee (1989) did for information.”

In addition, the companies have to address conduct issues, including those related to anti-money laundering and know your customer. Moreover, the firms have to thoroughly research “how digital identity management could be achieved (Brown (2014)) while balancing privacy considerations.”

Over the last few weeks, the idea of countries creating their own digital currencies has been actively discussed after the post published by Yanis Varoufakis. “The technology of Bitcoin, if suitably adapted, can be employed profitably in the eurozone as a weapon against deflation,” the Greek finance minister wrote in its blog.

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