The Bank of England may be the first major central bank to put its currency on a blockchain which would be a ‘game changer’ for payments, Caitlin Long, president of Symbiont, has predicted.
When it comes to foreign exchange, the ‘big three’ central banks are the US’ Federal Reserve, the Bank of England (BoE) and Bank of Japan, with the majority of international payments going through at least one of these banks.
Russia recently announced it would release a digital form of is currency -the ‘CryptoRuble’.
The International Monetary Fund (IMF) has said they are exploring using blockchain for special drawing rights.
Other central banks that have expressed an interest in putting their currency on a blockchain include the Bank of Canada, People’s Bank of China, and the Bank of Estonia.
However, Long told GTNews: “Until one of the big three central banks puts their currency on a blockchain, digital currencies are not really a game changer.However, if one of the big three central banks put their currency on a blockchain, that really will change how corporate treasurers move cash.”
“Most of the liquidity in the foreign exchange market is in these three banks. This is something that isn’t too well understood when it comes to foreign exchange.
“This is why London is a financial centre. It is not that easy for Paris to pry that away from London because the liquidity is in pound sterling”
“It is not enough just to put a country’s currency on a blockchain. It is still going to go through the super-regional central bank,” said Long.
She argued that if the BoE put sterling on a blockchain then all of the international payments it processes would be settled faster.
This would, in turn, free up trapped capital on a corporate treasurer’s balance sheet as they would not need to maintain as large comfort deposits to prevent accounts from being overdrawn.
“I expect the BoE to be the first one to do it,” said Long.
“It has publicly talked about being the furthest along in that process and think about Brexit. They want to show that they are still a leading financial market.
“This is why London is a financial centre. It is not that easy for Paris to pry that away from London because the liquidity is in pound sterling,” Long added.
In 2016, the BoE published a whitepaper, called Macroeconomics of central bank issued digital currencies, exploring this idea.
Blockchain for treasury: reducing minimum cash deposits
A ‘super central bank’ putting their currency on blockchain isn’t the only way the technology can be used to benefit treasurers.
By using blockchain technology and smart contracts to make payments, the increased speed would allow treasurers to reduce the minimum cash balances they are required to hold in corporate bank accounts.
“All but the highest rated companies need to keep minimum cash deposits, so they don’t end up overdrawn,” said Long.
“This traps a lot of really expensive capital, so if payments could be sped up it would allow a lot of that capital to be released and, in some companies’ cases, it is very material how much is trapped in minimum capital deposits. This is true around the world.
While moving money from the US to the UK is typically overnight, a US payment to a company in an emerging market can take as many as five days.
“I know a mid-sized company that has 1000 bank accounts so that notion of reconciling those 1000 bank accounts and ensure the minimum capital is in them every day and ensuring they don’t have to pay any penalties – that is a pain point for a treasurer,” said Long.
“Blockchain can solve that, not by solving the accounting, but by speeding up the payment. It is in their interest to get blockchain adopted for payments,” she argued.
“I know some very large corporate treasurers who have been dipping their toe in bitcoin since 2014. No one has publicly disclosed it yet but there are some very large corporate treasurers experimenting with using it for cross-border payments”
Corporate treasurers should be pushing their banks to introduce this type of blockchain technology, Long believes.
“Banks are ultimately in the customer service business. They will listen to their customers and treasurers and banks will ultimately benefit from it.
Corporate treasurers are already experimenting with bitcoin to speed up international payments, according to Long.
“I know some very large corporate treasurers who have been dipping their toe in bitcoin since 2014. No one has publicly disclosed it yet but there are some very large corporate treasurers experimenting with using it for cross-border payments,” she said.
“This year bitcoin is trading about $3bn a day, so the amount of money that can be moved about without moving the market is starting to become meaningful enough for corporate treasurers to use it.”
“They have been using it to transfer money to other countries that don’t have well-developed banking sectors where the ability to settle a payment quickly mattered,” Long added.
Bitcoin is now trading enough volume so that large companies can use it for international payments without moving the market.
“The bid-offer spreads on bitcoin had previously been so wide that it never made sense,” explained Long.
“But, this year bitcoin is trading about $3bn a day, so the amount of money that can be moved about without moving the market is starting to become meaningful enough for corporate treasurers to use it,” she continued.
These small bitcoin payments would not be useful when moving money from the US to the UK for example, but large companies such as McDonalds or Coca-Cola that operate in emerging markets across the world need to move money into countries that don’t have well-developed banking systems.
“There is very little stability in some emerging market currencies and the banking systems themselves may not be stable, so bitcoin may be more stable on a relative basis and easier for companies to use.”
Bitcoin may have higher bid-offer spreads than some more traditional payment methods, but it enables immediate payments to some countries that would otherwise require a five-day transfer time.
When asked about the stability of bitcoin, Long replied: “There is very little stability in some emerging market currencies and the banking systems themselves may not be stable, so bitcoin may be more stable on a relative basis and easier for companies to use.”
“I can attest, without telling you who it is, that large corporates have been using bitcoin since the summer of 2014,” Long told GTNews. “They are just not interested in disclosing it publicly because they don’t want the scrutiny.
“Corporates are not as regulated as the banks themselves. They don’t have the same level of compliance requirements before they can touch cryptocurrencies, which is why it shouldn’t be a surprise that they have been testing it out.
“This is small amounts, kicking the tyres,” Long added.
Cryptocurrencies have gained in popularity in recent years as speculative investors have entered the markets looking to take advantage of the recent surges in value. Access to virtual currencies – and especially bitcoin – has become a lot easier
Digitization also has the power to fundamentally reshape the way treasury operates and the services it can provide directly to the business. These can be grouped roughly into ‘process optimization’ versus ‘enablement’ of new capabilities and services
Digitisation is set to reshape not just the role of treasury and the business it supports but the very core of how businesses interact with their customers and the marketplace.
In the world of payment processing, treasurers and finance managers have benefited significantly from faster, more secure systems that have allowed for leaner and more progressive business processes. However, the waves of regulations in financial markets have led to tighter and stricter procedures.