Bank of England settlement service could support blockchain payments

The Bank is currently in the process of modernising its real-time gross settlement (RTGS) payment service and carried out 'proof of concept' testing earlier this year which involved looking into whether the renewed RTGS service could "provide and consume acceptable forms of cryptographic proofs".

The Bank said some of the businesses it worked with in the testing "were able to interact" with the RTGS test environment using an application programming interface (API) to successfully settle transactions they made using blockchain, or distributed ledger technology (DLT).

Baton, Clearmatics, R3 and Token were the fintech companies that the Bank collaborated with in the tests.

"During the test the participants acted as both a payment scheme and as an RTGS member using that payment scheme," the Bank said. "Participants were able to move funds between accounts and fund and defund collateral accounts. When funding and defunding it was important to ensure balances in RTGS and the payment scheme were fully aligned. Payments were then made within the participant’s payment scheme, resulting in net exposures between RTGS members which couldn’t exceed the level of funds held by those members’ in RTGS. The participant then originated a settlement message from the scheme to settle net exposures."

The Bank said it would now "investigate" the potential interaction between the RTGS service and DLT further.

"The RTGS renewal programme will … investigate whether the renewed RTGS service can provide and consume acceptable forms of cryptographic proofs. This is not intended to be available in an early phase of the programme, but the Bank will investigate how cryptographic proofs could fit into the design of RTGS architecture. The Bank will monitor changes in methodologies and evolving technology for cryptographic proofs."

Charlie Clarence-Smith of Pinsent Masons, the law firm behind Out-Law.com, said the development was exciting.

"This is an ambitious move by the Bank of England to rebuild the RTGS system which is used to transfer large volumes of funds between banks and make it interoperable with DLT," Clarence-Smith said.

"It should be noted that the Bank is not looking to replace the RTGS with DLT but are investigating the possibility of connecting the two platforms together. In the future, DLT may sufficiently mature to provide the core for the next generation RTGS but it is not envisaged to happen anytime soon," he said.

The Bank was prompted to look to modernise its RTGS payment service following a major outage incident in 2014.

In October 2014, an approximate nine-hour outage of the RTGS system caused delays to the processing of 142,759 CHAPS payments valuing a total of £289.3 billion. Deloitte conducted an independent review, commissioned by the Bank, into the incident and recommended a series of reforms to strengthen the resilience of the RTGS service, which the Bank committed to undertake.

In its blueprint for a new RTGS service, the Bank outlined plans to design a revised system that is more resilient to threats to data loss, integrity and confidentiality, among other things, and to ensure that all members of CHAPS are subject to "a materially more efficient" testing regime on issues of resilience and security.

In addition, it said it would build a third settlement platform as a contingency for the two sites the service will run on ordinarily.

The reforms will also see communications relating to RTGS conform to the ISO 20022 messaging standard, and a move towards 24/7 operation. UK payment service providers (PSPs) that are not banks, such as many emerging fintech firms, will also be given broader rights of access to the new payment system too, under the Bank's plans.