The Bank of England has launched a proof of concept on using distributed ledger technology for payments as the Bank for International Settlements said doubts remain regarding the maturity and the size of efficiency gains associated with the use of DLT.

The Bank of England published a proof of concept on 27 March 2018 to understand how payment technologies, such as those using DLT, could be used for its Real Time Gross Settlement service. RTGS is the infrastructure which allows the UK central bank to move money in real time between financial institutions such as banks.

The central bank said in a statement: “Although the Bank has concluded that distributed ledger technology is not yet sufficiently mature to provide the core for the next generation of RTGS, it places a high priority on ensuring that the new service is capable of interfacing with DLT as and when it is developed in the wider sterling markets. Therefore, the Bank is undertaking a proof of concept to understand how a renewed RTGS service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on DLT.”

The Bank is partnering with a range of firms – Baton Systems, Clearmatics Technologies, R3 and Token – who are developing new payment technologies. Participants in the proof of concept can access a cloud-based system developed by the Bank of England which replicates a version of RTGS service. A summary of findings from the proof of concept is due to to be published later this year.

The Bank for International Settlements said in a report last month that central banks must carefully weigh the implicationsof issuing digital currencies for financial stability and monetary policy . BIS considered the use of a wholesale central bank digital currency, with limited access to a predefined group of users to make settlements more efficient, as well as a general purpose central bank digital currency for the general public.

BIS newsletter – in this issue: Central bank digital currencies, cash and crises – https://t.co/ydFAbmBUki

— Bank for Intl Settl. (@BIS_org) April 4, 2018

“It finds that wholesale central bank digital currencies might be useful for payments but more work is needed to assess the full potential,” added BIS.

The study continued that wholesale central bank digital currency and DLT may enhance settlement efficiency for securities and derivatives.

“Currently proposed implementations for wholesale payments – designed to comply with existing central bank system requirements relating to capacity, efficiency and robustness – look broadly similar to, and not clearly superior to, existing infrastructures,” said BIS.

The report added that early experimentation has not shown significant benefits for wholesale payments using central bank digital currencies and DLT.  In particular, central banks have very rigorous operational requirements for reliability, scalability, throughput and resilience because their services are essential to the smooth functioning of an economy.

“Doubts remain regarding the maturity of the technology and the size of efficiency gains associated with the use of DLT,” added BIS. “Moreover, changes could imply expanded – direct or indirect – access to a central bank account with new counterparties, which could be difficult to control.”

However the study continued that as technologies and related possible designs are evolving quickly, central banks need to continually assess whether they will be useful.

“Many questions surrounding operational risk management and governance need to be answered before deployment can be envisioned,” said BIS. “This may especially be the case for countries at earlier stages of financial infrastructure development.”

Reuters reported last month that the DTCC, the US central settlement system, had decided to stop testing a blockchain for clearing and settling repurchase, or repo, agreement transactions. Murray Pozmanter, head of clearing agency services at the DTCC, told Reuters that banks and other potential users believed the same results could be achieved more cheaply using current technology.