John Underwood reports on the Economic Affairs Committee’s findings and how the Bank of England hope the Government’s adoption of Bitcoin’s ‘Blockchain’ technology could help save ‘rather more’ than $16 billion.
The Economic Affairs Committee of the House of Lords yesterday took evidence from academics, financial experts and a Deputy Governor of the Bank of England on the topic of blockchain technology: the digitally distributed ledger that underpins cryptocurrencies such as Bitcoin.
Depending on who you ask, digital currencies are either the new gold or the new tulips – or somewhere in between. Bitcoin, by far the largest and best known, allows for universally verifiable, irreversible payments with low transaction fees that are tracked on an open source ledger which records the total number of Bitcoins in existence and their locations in the ‘wallets’ of users.
That number grows continually as connected computers ‘mine’ new Bitcoins through a process of calculations, but it will eventually stop; around £8tn in Bitcoin already exists, with a single Bitcoin currently worth around £513.
Although this particular use of blockchain technology has become well-known, it has many other potential applications. Professor Michael Mainelli of Gresham College highlighted the variety of ways in which distributed ledgers could be useful to government, from ultra-local taxes to more efficient waste management. The ability to instantaneously assess the ownership, provenance and other status of assets (such as, for example, whether a car is correctly taxed and tested) could also transform administrative areas that currently require huge quantities of personnel and paperwork.
While the prospect of manpower savings would have an impact on employment, as do many modern automated processes, potential savings for admin-heavy industries could be vast.
Dr Ben Broadbent, Deputy Governor for Monetary Policy at the Bank of England, dismissed prospective UK government savings of $16bn as chickenfeed. ‘Frankly, in the grand scheme of things, that is a very, very small number. If this is an important technology I would hope for savings that are rather bigger than that.’
Dr Broadbent clarified that Bitcoin, which is notorious for its association with the lawless ‘dark web’, is not a model that the Bank of England would be inclined to emulate. Responding to Lord Forsyth’s concern that those wishing to transfer money to ‘some terrorist or drug baron’ could do so at will, he explained that Bitcoin is a so-called ‘permissionless system’. This allows every user to remain anonymous, but repeatedly verifies their virtual identity (‘they don’t know the name and they don’t know the rank, but they know the serial number’) at some considerable cost of computing power.
Any setup used by a central bank would be likely to employ a ‘commissioned system’, since at the very least the bank’s identity would not need to be repeatedly verified. ‘You would sacrifice some degree of anonymity, but you would also save on the costs of operating such a system.’
Lord Turnbull was concerned that a further level of technical knowhow would be required to undertake simple tasks. ‘If you go onto the Internet and all you want to do is buy a garden spade or something… you have to answer a whole questionnaire.’ ‘If you want to buy a garden spade,’ replied Professor Mainelli, ‘I would recommend not using the block chain.’
What, then, are the odds of ‘digital sterling’ becoming a reality in the near future? Lord Spens of PricewaterhouseCoopers observed that in the financial services industry specifically, the main barrier to rapid rollout is collaboration: ‘Banks don’t need to share information; if you’re an airline or a travel agent, you must share information.’
Dr Catherine Mulligan of the Imperial College Centre for Cryptocurrency Research also pointed out that future developments in quantum computing will eventually render distributed ledgers defenceless. No to worry though, as Professor Mainelli dismissed ledgers in general as ‘boring’, adding that ‘the only exciting thing about ledgers was when this place burnt down in 1834’.
The Economic Affairs Committee was due to hear from two more expert witnesses before the end of the session; unfortunately, my connection to the House of Lords livestream was abruptly interrupted moments into their presentation. Although Hansard will eventually provide me with the remainder of the afternoon’s discussion, the fault served as a salutary reminder that no technology, however seemingly impressive, is foolproof.