BoE says no blockchain revolution in share settlement anytime soon

September 20, 2016 9:13 AM EDT

The Bank of England is seen in the City of London in London, Britain August 4, 2016. REUTERS/Neil Hall/File Photo

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By Huw Jones

LONDON (Reuters) - A blockchain revolution to simplify stock and bond settlement won't happen anytime soon, though change to today's "cat's cradle" of costly intermediaries is unstoppable, a senior Bank of England official said on Tuesday.

Andrew Hauser, executive director, banking, payments and financial resilience, said the case for reform is easy to state given the "extraordinarily complex and balkanised" global system for settling securities transactions.

Settlement involves the exchange of ownership for payment for a stock or bond after a trade.

"That siloised model delivers settlement and collateral movements which, though much smoother than they were 20 years ago, are still typically measured in days rather than minutes or hours," Hauser told an industry event in London.

Pressure for a cheaper system, such as near instantaneous settlement of trades, is coming from banks wanting sharp cost savings to deliver improved returns on equity to investors.

Shares are typically settled within two days of a trade, a delay which forces banks to set aside capital and collateral in case the transaction goes wrong in the meantime.

Hauser said one widely touted driver of change could be the use of blockchain, or distributed ledger technology which underpins the bitcoin virtual currency. It provides a record of transactions that can't be altered but can be accessed by many.

Proponents say it promises seamless, real-time settlement that cuts out many intermediaries in the current settlement chain.

"There is no likelihood of such an extreme revolution occurring any time soon," Hauser told the event to mark the 20th anniversary of Crest, the platform that settles UK stocks and bonds transactions.

"Much more work is needed across a whole range of issues, including: speed and scalability; confidentiality protections; developing common protocols; integrating cash and securities movements; and establishing regulatory and legal norms."

The sector will take heed of Hauser's words given that Britain is set to leave the European Union, and set its own rules for the settlement and payments sectors.

Hauser said that in many cases, reform to outmoded business processes will need to precede any application of blockchain.

"But there is clearly scope for less ambitious but still potentially transformational applications in specific markets, not least those where current infrastructure is less well developed," he said.

A key challenge for firms in the sector is whether to take on upstarts head on, or team up with them.

"But doing neither is a risky approach," Hauser said.

(Reporting by Huw Jones; Editing by Susan Fenton)

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