2023 New Value Report

Bank of England: Scaling Real-Time Gross Settlement

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The Bank of England is looking forward. Image: Shutterstock

In a recent consultation paper titled, “A new RTGS service for the United Kingdom: safeguarding stability, enabling innovation,” the Bank of England sought to answer crucial questions about the bank’s real-time gross settlement (RTGS) service, asking for input from experts like Ripple. On an average day, RTGS settles around £500 billion between banks. As a central bank with a key role in monetary policy and a mainstream platform for payments, the Bank of England is keenly interested in the future, and how current innovations can help them evolve to meet the changing needs across the global settlement landscape.

Bank of England study on the future of RTGS: new tech will reshape #payments. Tweet This

The future of the RTGS system in the U.K. depends on the decisions made in the coming years that will support interoperability and scalability required in a world of real-time payments between people, corporates, and even autonomous devices.

In particular, the report expresses the bank’s belief that the future of their RTGS system will likely involve interoperation with distributed ledger technology (DLT). The report postulates three potential roles for DLT: as a platform for core RTGS, securities settlement, or as a platform for a future class of digital assets with which RTGS would need to interoperate. The Bank of England “recognizes that these new technologies have the potential to reshape the future payment landscape,” and plans to pursue an active research agenda to explore its capabilities.

The Bank of England has a few specific goals for the future of their RTGS system. First, they want to increase access to central bank settlement for institutions. Next, they want the kind of resiliency defined above. In a time when bank hacks are a chief concern all over the world, resiliency is an important factor in overall security. Finally, the report focuses heavily on the crucial issue of interoperability.

On the subject of DLT, the report identifies three key potential benefits:

  • Trust
    • Consensus as a requirement to update the ledger replaces old-fashioned trust between correspondents.
  • Resilience
    • Technological and geographic diversity of nodes on the network make it more resistant to failure, disaster, or tampering than a more centralized, homogeneous system.
  • Shared state of proof
    • Each node in a DLT network has an identical copy of the shared information, so that all participants are constantly up-to-date.

One of the key points of the report is synchronization: facilitating settlement in different locations at the exact same time. This concept is very similar to the concept of atomic settlement as described in the Interledger Protocol white paper.

“Settlement risk can arise where payment transfers linked to the same underlying economic transaction occur in different systems, at different times, in different currencies, or in different locations. The Bank’s second proposal for enhancing interoperability is to provide functionality that could enable the synchronization of cash movements in RTGS with cash or other asset movements made in other systems.

“Synchronization draws together several different themes that emerged from the Bank’s outreach phase. These include: (a) whether the Bank could design the new RTGS in order to support multi-currency transactions and cross-border payments, where both technology firms and RTGS participants reported an active search for new solutions; and (b) the relationship between central bank settlement and possible future clearing and settlement venues emerging as the result of technological change in payments.”

The RTGS system that this report examines will be twenty years old this year. By examining the ever-increasing demands of the world of global payments in the context of the best available solutions, the Bank of England is taking important steps to safeguard the financial stability of the U.K. The U.K. has thus far been a model to Europe and the rest of the world in an efficient domestic payments scheme; by adapting and seeking to interoperate with global systems, the Bank of England is on the right track to keep it that way.

Read the full report here.

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