The Bank of England has started a proof of concept project to understand how the renewed Real Time Gross Settlement (RTGS) service could be capable of interacting with distributed ledger technology (DLT).

A statement explained that although the BoE concluded that DLT 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.

RTGS’ are special payment systems where the transfer of funds is conducted between banks in real time and on a gross basis, meaning transactions are settled as soon as they are processed on a one-to-one basis. These systems are mostly used for high value transactions requiring instant clearing and operated by central banks.

DLT is a shared database which enables the keeping and sharing of records in a distributed and decentralised way, while ensuring its integrity through the use of consensus-based validation protocols and cryptographic signatures. Previous research by the BoE concluded that DLT has the potential to reduce costs and increase the efficiency of securities settlement, as well as enhancing the security of transactions.

In May 2017, the BoE published its RTGS blueprint, stating the renewed service would provide a diverse and flexible range of settlement models to ensure payment infrastructures have access to the central bank. It then announced its intention to develop a payment service compatible with blockchain technology, but a recent BoE announcement rejected the idea of migrating to DLT entirely due to the technology’s immaturity.

For the proof of concept, the BoE is partnering with companies such as Baton Systems, Clearmatics Technologies, R3 and Token, all of which develop payment solutions using innovative technologies. They will examine the ability of DLT-based payment systems to interact with the renewed RTGS service and qualify ways in which the service’s functionality could be expanded.

Findings will be reported later this year, setting out any enhancements to the settlement functionality offered in the renewed RTGS service to accommodate payment systems using innovative technologies, along with any further work that needs to be undertaken to identify ways in which the renewed RTGS service functionality could be expanded.

Naeem Aslam, chief market analyst at Think Markets, told FStech that central banks have been working on models which are way too obsolete - settlement process, flexibility and range of markets - and there is a major need for the banks to not only adopt, but keep up with, the pace of technological advancement.

“Once the DLT has proven its strength and convinced central banks that it is the vital piece of the future technology, the use of systems like RTGS service would only improve the process further,” he added.

Earlier this week, the European Central Bank (ECB) and the Bank of Japan (BoJ) released their study of Blockchain's potential for transforming securities settlements. Dubbed ‘Project Stella’, the summary of findings looked at how DLT could function in various securities transactions.

The research identified a type of securities settlement called Delivery versus Payment (DvP), which is when operating systems “link the transfer of two assets in such a way as to ensure that the transfer of one asset occurs if and only if the transfer of the other asset also occurs”.

The ECB and BoJ stated: “DvP could be conceptually and technically designed in a DLT environment with cash and securities on the same ledger (single-ledger DvP) or on separate ones (cross-ledger DvP).”

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