The Bank of England (BoE) has published its Supervision of Financial Market Infrastructures (FMIs) – Annual Report. And inevitably buried within there are some interesting comments when it comes to innovations in finance.
The Bank regulates FMIs in three broad categories: payment systems, central securities depositories (CSDs), and central counterparties (CCPs). Obviously, these categories are of systemic importance and are vital to the economic operations of the country.
FMIs are all “highly interconnected” within the broader financial services sector:
“FMIs contribute to financial stability by providing reliable and secure payment, clearing and settlement services to their users. It is vital that these services are resilient to financial and operational shocks. FMIs can also contribute to financial stability by encouraging or requiring their members to take steps that reduce risks that are inherent in making transactions and by ensuring that they avoid behaviours that could create stress elsewhere in the financial system.”
Beyond the obvious concerns pertaining to Brexit, Fintech continues to be a point of interest. The Bank states:
“The FMI landscape has seen significant change over the recent years. Post-crisis regulatory reforms have led to an increasingly important role for FMIs within the financial system. In addition, technological advances and the growth of fintech continue to have an impact within the FMI environment. The UK’s withdrawal from the EU will also have significant implications for the UK-EU future trading relationship and for the FMI-related work that the Bank undertakes in 2019. The Bank will continue to monitor these developments to ensure that risks posed to, and by, FMIs are appropriately mitigated. This chapter outlines some of the main areas of focus for the Bank’s work on FMIs in the next year.” [emphasis added]
More specifically, payments potentially executed on blockchain or distributed ledger technology (DLT) is of emerging interest.
The UK government formed a Cryptoassets Taskforce last year, the Bank has been part of this initiative. A report which was released in October indicated that the Bank must be “alert to potential issues related to cryptoassets as part of its supervision of FMIs.”
The BoE notes that a payment system which may be based on DLT may potentially be brought under their supervision.
“More broadly, the Bank is also considering the future of payments as part of the Future of Finance project, which explores what the financial system of the future might look like, and what it means for the Bank’s priorities. This will culminate in a report that will include a set of implications for how the Bank can support the UK’s evolving financial sector landscape while continuing to meet the Bank’s main objectives of maintaining monetary and financial stability.”
The BoE was also engaged with the Bank for International Settlements and their report on “Central Bank Digital Currencies” or CBDCs. The BIS report was effectively a cautionary note to go slow as it remains unclear if the benefits outweigh potential costs.