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

In a lengthy appraisal of distributed ledger technology, Cunliffe weighed its technical implications, which will be examined in greater detail when the FMI Sandbox premiers in 2023.

There’s more to crypto than just assets, Bank of England deputy governor Sir Jon Cunliffe reminded the Association for Financial Markets in Europe Conference in London on Sept. 28. The distributed ledger technology (DLT) behind crypto assets has far-reaching implications for traditional markets and interoperability.

DLT will touch on trading, clearing, settlement and custody as it is integrated into capital markets, Cunliffe said. One of the biggest differences Cunliffe identified in DLT was its speed. Instantaneous settlement can reduce risk by removing the chance of drastic market movements while a transaction is being processed, but:

“The development of instantaneous settlement also poses challenges for the management of liquidity as it requires all cash and securities to be in place at the time a trade is struck […] though I should stress that it [settlement] need not be instantaneous or decentralized.”

Smart contracts combine activities and thus reduce the number of intermediaries and the fees associated with them, Cunliffe said. They could increase resilience in the system for the same reason and incorporate related services like the payment of coupons on bonds or “management of more sophisticated securities trades.”

Today’s first keynote is given by Deputy Governor for Financial Stability, @bankofengland, Sir Jon Cunliffe, who focused his speech on the potential impacts of the crypto world on post trade infrastructure #OPTIC2022 pic.twitter.com/1fY4A7omPw

— AFME (@AFME_EU) September 28, 2022

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

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

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

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