File photo dated 06/03/14 of the Bank of England in London, which has told lenders to prove they are not taking on too much risk in the latest step of its crackdown on soaring consumer lending. PRESS ASSOCIATION Photo. Issue date: Tuesday July 4, 2017. The Bank's Prudential Regulation Authority (PRA) has ordered firms to provide details by September as it tightens up scrutiny of the sector. See PA story ECONOMY Lending. Photo credit should read: Gareth Fuller/PA Wire
Bank of England governor Mark Carney has said that system changes are needed to help handle new demands as the financial industry evolves © PA

The Bank of England has carried out a successful test of an “interledger” programme developed by Ripple, the California-based blockchain specialist, to synchronise a payment between two central banks’ systems.

The test did not involve real money, nor any of the BoE’s core systems, or even use blockchain technology itself. However, the proof of concept announced on Monday evening marks an important moment for the blockchain community.

“This is really about connectivity between central bank systems rather than replacing the central bank systems with the blockchain,” Daniel Aranda, head of Europe at Ripple, told the Financial Times. “It allows money to move between countries near-instantaneously and without settlement risk.”

The BoE tested whether it could synchronise a multimillion-pound wholesale payment passing from its own settlement system, known as the Real-Time Gross Settlement (RTGS), to another central bank’s core system.

The central bank said it set up two simulated RTGS systems on a cloud computing platform, using the Ripple interledger to simultaneously process “a successful cross-border payment”. “We also demonstrated that an attempted cross-border payment that failed validation on the receiving side would not be honoured,” it said. 

The 21-year-old RTGS system handles about £500bn of payments between banks every day, facilitating a huge range of transactions — from settling company invoices to house purchases.

Mark Carney, governor of the BoE, has said that changes are needed to help RTGS handle new demands as the financial industry evolves.

He launched the overhaul three years ago after parts of the payments system suffered an embarrassing nine-hour outage that forced the BoE to start processing important transactions manually.

The central bank has already concluded that distributed ledger technology, the shared database and cryptographic system that underpins virtual currencies such as bitcoin, is “not sufficiently mature” to support the core RTGS system.

But it said the test of Ripple’s software had reinforced its intention to ensure the new payments settlement system was fully compatible with the new technology and “highlighted areas where we would like to conduct more exploratory work”.

One question it flagged as needing more work was how to handle issues around the availability of liquidity when processing wholesale cross-border payments.

Mr Aranda at Ripple said the test showed that the interledger, which uses cryptographic algorithms to securely co-ordinate money transfers, could reduce the time it takes to settle a large cross-border payment from between two and four days to “only a few seconds”.

“Instead of having to rely on a series of counterparties, it is central bank to central bank, which is lower risk and therefore lower cost,” he said.

In May, the Bank of Canada officially abandoned its experiment with blockchain, or distributed ledger technology, citing “a fundamental inconsistency or tension” between the country’s centralised wholesale interbank payment system and the decentralised principle of blockchain. 

That provided plenty of ammunition to blockchain sceptics. But it contrasts with the more upbeat tone from the BoE, itself run by a former Bank of Canada governor, about its progress on harnessing new technologies to make its core payments system ready for the future.

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