Bank of England Deputy Governor Cunliffe on DLT securities settlement: Not so fast!

There is more to crypto than just assets, Bank of England Deputy Governor Sir Jon Cunliffe reminded the European Financial Markets Association conference in London on September 28. The distributed ledger technology (DLT) behind crypto assets has far-reaching implications for traditional markets. and interoperability.

DLT will address trading, clearing, settlement and custody as it integrates into capital markets, Cunliffe said. One of the biggest differences Cunliffe identified in DLT was its speed. Instant settlement can reduce risk by eliminating the possibility of drastic market movements while a transaction is being processed, but:

“The development of instant settlement also poses challenges for liquidity management, as it requires all cash and securities to be in place at the time a trade is executed. […] although I should stress it [settlement] it doesn’t have to be instantaneous or decentralized.”

Smart contracts combine activities and therefore reduce the number of intermediaries and the fees associated with them, Cunliffe said. They could increase the resilience of the system for the same reason and incorporate related services such as paying coupons on bonds or “managing more sophisticated securities transactions”.

Cunliffe, a longtime advocate for greater crypto regulation, had a number of caveats to share. First, he said, DLT is relatively unproven. In addition, decentralization may need to be limited:

“It is very difficult to see how risks can be managed at the appropriate level without a legal entity responsible for the services provided and responsible for the proper functioning of the system.”

Currently, “central banks offer the rails in which these [settlement] assets are transferred to their jurisdictions,” Cunliffe said, and the Bank of England could create its own DLT to accommodate transactions in the future or create ways to “connect” the current real-time gross settlement system to DLT systems Fabio Panetta, a member of the European Central Bank’s executive board, discussed the same options at a symposium held on 26 September.

Related: BoE official compares current crypto market regulation to ‘unsafe planes’

The Bank of England, the Financial Conduct Authority and HM Treasury will have a Financial Markets Infrastructure (IMF) test case by 2023 to explore performance and regulatory issues, Cunliffe said.