It was billed as the possible advent of "Britcoin", or central bank-issued digital currency, but the Bank of England took a rather cautious approach when giving evidence about the potential of blockchain technology in the House of Lords.
Giving evidence first, Dr Ben Broadbent, deputy governor, Monetary Policy, Bank of England, stated that digital central bank currency was far off in the future, adding that such a thing would face not just technology barriers but would also be a question of policy, since it would involve a significant restructuring of the financial system.
He said: "if you are talking about an all singing, all dancing central bank digital currency, replacing not just the liabilities we currently handle, but prospectively substituting for commercial money then yes, that is a long way off. That is not just about technology; that would be a matter for the shape of the financial system.
"Some of these questions are similar to those posed by what's called 'narrow banking'. A narrow bank is one whose assets are as liquid as its liabilities. That is not the case for banks we have today, never really has been.
"That imposes a risk to the system and it's why we have insurance in the form of lender of last resort, for example, and lots of regulations.
Broadbent said it would be very nice to have a system where all deposits have a fixed value that you can move around instantaneously, but banks would then be obliged to hold equal amounts of very liquid assets. "That is a debate about what the banking system should look like that goes back centuries."
Debate turned to the question of how blockchains could optimise the post trade clearing and settlement arena. The House wanted to know if settling securities in this way constituted systemic risks. Broadbent said: "It's not clear to me that this technology would make risks that already exist today any worse. There are different aspects to consider, but there are some parts which may make the system more robust."
Also supplying evidence were: Dr Catherine Mulligan, associate director, Imperial College Centre for Cryptocurrency Research; Professor Michael Mainelli, Emeritus Mercers' School Memorial Professor of Commerce, Gresham College; Lord Spens, Transformation and Assurance director, PWC; Blythe Masters, chief executive officer, Digital Asset Holdings, LLC (via speaker phone from the US); and Simon Taylor, co-founder/director of Blockchain, 11:FS
Professor Mainelli kicked things off by pointing out that blockchains remove a tendency towards monopolistic behaviour across a range of sectors, private and public. In this regard he mentioned electricity transfer systems, wholesale insurance, shipping, health and ID systems. We should look to Estonia for an example of how blockchain-like systems have been implemented, he added.
The issue of the now rather infamous GovCoin proof of concept was raised. The notion that those in receipt of benefits might find the manner in which they are allowed to spend this money essentially programmed into a digital coin worried the Lords; Big Brother was mentioned.
Lord Darling asked: "Could you spend it at the bookies; could you move it from the app to a NatWest bank account and then spend it at the bookies?" The experts seemed to be unsure of how GovCoin would actually be used.
Asked for their killer blockchain apps, Mainelli opted for reconciliation; Patrick Spens PwC said the technology was still in the laboratory but allowing central banks to remit money between one another was a sturdy use case; and Mulligan agreed that intra-central bank money movement was sensible.
Moving on, Lord Hollick asked Blythe Masters to unpack the blockchain analogy, that it can function as "email for money". Masters answered that this analogy was used to get the business point across, but perhaps not the technology, because emails can easily be copied; the innovation of blockchain is to keep a shared record of all transactions so that digital assets cannot be copied and spent twice.
Simon Taylor said blockchains could pave the way for entirely new asset classes and also release the power of a system that both audits and reports on business functions. For now, however, baby steps are needed, using things like interest rate swaps, credit default swaps, commercial paper.
Taylor said: "You don't want to centralise one balance sheet. If anything what this is doing is moving away from that systemic risk we have seen in the market; we have seen a move towards CSEs and CCPs and one balance sheet. What we are now seeing is the repatriation of that, operating with the banks and a separation of the marketplace."
Masters referred to a project involving her company Digital Asset Holdings and the main Australian stock exchange ASX, to rebuild post trade functions for cash/equities on a distributed ledger. She pointed out that this meant replacing a major piece of market infrastructure which is already subject to a plethora of regulation.
"As far as containment of risk is concerned, you have to keep regulators happy; there's privacy, recovery, performance. There is a roadmap to follow with this infrastructure. You don't just wake up one morning and adopt a new system that could put us all at risk.
"After 30 years working in capital markets I'm very comfortable that this technology is defensible from a risk reduction standpoint."
This prompted Lord Forsyth of Drumlean to say: "Forgive me, but weren't we told the same thing about certain financial instruments back in 2008."
Masters answered:"I think there were very important lessons learnt of course. This has informed a couple of objectives of the work we are doing today.
"Number one, a lack of transparency in terms of the nature of the contractual arrangements between entities made the job of regulators in understanding the risks in the system almost impossible.
"Number two, the inter-connectivity between institutions, the potential for contagion of risk essentially led to fear that paralysed markets.
"The difference here is that these systems are being designed to give visibility to regulators, on an unprecedented scale relative to what they have today, of the nature of interactions between parties from the point of view of unsettled obligations, which creates risk in a stressed market environment.
"We are talking here predominantly about post-trade processing. The regulator having a real time view into that and being able to interrogate that, rather than gathering post trade reporting and trying to aggregate it.
"This is a potentially significant step forward in tackling the transparency problem, which has not yet been resolved despite the good intent of the post-crisis reforms."