The Bank of England has been issued with a proposal for a blockchain operating system in response to a consultation it published exploring the potential launch of a state digital currency.
The proposal, developed by L3COS, is designed to underpin regulated digitisation of the UK economy, serving as the underlying technology for the Bank of England to issue its own digital currency.
“The L3COS platform will facilitate a central bank digital currency (CBDC) for the Bank of England this would be an electronic form of central bank money that could be used by households and businesses to make payments,” Zurab Ashvil, CEO and founder of L3COS, told Verdict.
“Commercial banks and other financial institutions will benefit from Real Time Gross Settlement System (RTGS) that is built into L3COS ecosystem.”
The blockchain operating system would create an immutable digital ledger of all transactions made using the digital currency, which would enable them to be fully audited and traced as required. L3COS says that this would make “fraud, money laundering or other black-market financing impossible”.
“The L3COS platform uses a unique triple-layer consensus system which has the laws and regulations of each sovereign authority built into the technology,” said Ashvil.
“Only transactions that comply with the law are automatically verified making it impossible to engage in illegal activity.”
The company says the platform is the first of its kind for individual governments.
Blockchain operating system proposed as Bank of England ponders digital currency
L3COS’s blockchain operating system has been proposed to the Bank of England following its publication of the paper Central Bank Digital Currency: opportunities, challenges and design in March.
Here it proposed a CBDC that would be “used by households and businesses to make payments”, and invited proposals from the technology industry and beyond. However, it stressed that it had “not yet made a decision on whether to introduce CBDC”.
Central to its consideration of the technology is the fact that payments by debit card have now overtaken cash as the primary method of payment in the UK.
It also cited potential for better cross-border payments and the need to avoid private money creation dominating the digital landscape, presumably a reference to digital currencies such as Facebook’s Libra.
“It’s the right time for us to be thinking about the future of money and whether we, as the Bank of England, should consider this type of money that we provide to the public,” said Ben Dyson, manager, digital currencies team at the Bank of England, during a webinar outlining the paper in April.
Others have pointed to the benefits during an economic downturn, where changes to interest rates would be felt more immediately.
“Under these conditions the central bank could gain greater control over the transmission of interest rates to households and businesses,” Benoît Cœuré, a member of the executive board of the European Central Bank, told Raconteur.
“In a deep recession, it could reduce interest rates by more than is currently possible and stabilise economic activity more quickly, reducing the need for other non-conventional measures.”
Should the Bank of England launch a digital currency?
For some, concerns over private sector creep into the world of money is a strong reason for the Bank of England to launch its own digital currency.
“With the decline of physical cash, we risk surrendering even more power over our money and payments system to unaccountable private interests,” said David Clarke, head of policy at research and campaign group Positive Money, in response to the paper.
“It is timely that the government and Bank of England are working together to explore the benefits of a central bank digital currency, which would allow us to keep a form of public money and enable democratic control to be exercised over the monetary system.”
However, there are detractors to the idea.
Chief among the concerns is privacy, as a fully traceable digital footprint not only enables the prevention of fraud, but also removes the anonymity enjoyed by using cash. And while the Bank of England is keen to ensure privacy with its CBDC, there is realistically an unavoidable loss of anonymity with the technology.
“CBDCs would have to be designed to be compliant with these [data privacy] regulations, at the same time we want to ensure that the users of CBDCs can be confident that privacy in their payments and what data is shared and on what basis and with whom,” said the Bank of England’s Dyson in the webinar.
“It’s unlikely that a [CBDC] could be completely anonymous but we would like to design something that respects users’ privacy and gives people control over their data.”
Others have cited the risk of bank runs on a scale unseen with conventional fiat currency, including Vitas Vasiliauskas, chairman of the board of the Bank of Lithuania, who made the case at a conference hosted by the Bank for International Settlements in 2019.
“The issue here is that central bank money being risk-free also means that the retail CBDC would be a safe asset. As such, it might essentially substitute for, let’s say, bank deposits. Being more secure, and more convenient than cash, it could also be more attractive relative to a claim on a private bank,” he said.
“Such a substitution effect could facilitate a flight towards a central bank. In the extreme scenario, CBDCs could encourage ‘digital’ sector-wide bank runs which could occur in an unprecedented speed and scale.”
There are also concerns that the ease with which money could be moved across borders could prompt rapid retraction of cash to safe-haven cryptocurrencies in times of uncertainty, essentially draining economies.
Decision on CBDC may be influenced by Covid-19
For some experts, the decision on the Bank of England issuing a CBDC is ultimately going to be political, rather than technological, with ING economists Teunis Brosens and Carlo Cocuzzo arguing that the coronavirus pandemic may help improve government perceptions of digital currencies as a viable technology.
“In the end, whether CBDC arrives or not, was never, and never will be, a purely technological question. It was and will primarily be about political acceptance and alignment with other political strategic goals, both domestic and international,” they wrote in a report on the issue, published in April.
“In that respect, our initial assessment is that CBDC will be a more likely option post-Covid-19. The bigger role of governments and the close cooperation between them and the financial sector in combating the economic fallout will guide discussions about CBDC in the context of the role the financial sector has in serving society.”
The UK is not the only country to consider digital currencies and blockchain at a government level. Blockchain is increasingly being considered by governments, with the nation of Georgia using blockchain to register land titles, while Sweden is testing blockchain-based property transaction records.
L3COS, which is based in Delaware, the US, is pitching its blockchain operating system to a number of governments around the world.
“Blockchain is a tried and tested technology, with over 40% of S&P 500 companies using it to increase efficiencies and reduce costs. Now central banks and governments are looking at how this technology can work for them,” said L3COS’s Ashvil said in a company statement.
“We believe that L3COS’s unique triple-layer consensus technology is potentially transformative for digitalised economies, empowering governments for the first time to regulate digital economies while providing security and legitimacy to transactions.”