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Blockchain inspires central banks to create “hybrid systems”

Bitcoin’s core technology is inspiring a banking revolution. According to the Bank of England, several central banks are planning to develop and implement “hybrid systems” involving blockchain-like technology.

While banking institutions want to stay in charge of the financial system, they recognize the advantages of improving the current system with features inspired by Bitcoin’s distributed ledger technology, used to record crypto transactions.

However, this modernization of the financial system raises a few questions. The most important is “would this new system be centralized, decentralized or a full hybrid? Some research performed by these central banks seems to indicate a shift away from decentralization.

800px-Bank_of_England_2013_21The possible answer for now was recently provided by the Bank of England, which has been investigating BTC and exploring the blockchain. The central bank believes that electronic currencies like Bitcoin could fundamentally change the payments industry across the world.

“There is more than one way in which a distributed ledger system can work, and remuneration would have to be designed in such a way as to incentivise honest participation in the system without leading to socially inefficient over-investment in transaction verification,” the Bank of England recently said.

Like other central banks, the Bank of England is a regulatory institution working to promote financial stability across the system. And while our future financial stability might depend on a decentralized crypto technology, it’s still early to reveal more details about these “hybrid systems.”

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

One of the main problems listed by the central banks is the way Bitcoin manages itself. Mining is a big issue when it comes to sustainability: the cryptocurrency mining community currently uses more electricity than the Republic of Ireland. In other words, a more sustainable model would be necessary moving forward.

Also, there’s the question of regulatory control. “The first question is whether a protocol for a central bank issued digital currency could be developed at all. Creating such a system would entail creating a protocol for value transfer over the internet, akin to what Berners-Lee (1989) did for information. Firms offering digital currency services, such as wallets or currency exchange, would operate on top of the platform, raising the question of how they should be regulated,” the Bank of England added.

“As they would not be offering to hold funds on their own account, the prudential regulatory issues would probably be different from the conventional focus on capital and liquidity requirements at existing banks.

Conduct issues, particularly those relating to know your customer (KYC) and anti-money laundering (AML), would also have to be addressed by such firms. Further research would also be required into how digital identity management could be achieved while balancing privacy considerations.”

Nevertheless, while the Bank of England and other similar institutions keep trying to find a way to integrate the blockchain technology into their traditional systems without having to deal with the cons of such a process, the Ecuadorian government has already launched its own electronic money transfer system.

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