Working in Tandem: The Reform of Payment Systems and the Advance of Digital Technology

In my last article I examined a recent announcement by the Federal Reserve that detailed plans for implementing a new payment system called ‘FedNow‘ by the year 2024. The news that the Fed are seeking to redefine their payment infrastructure comes as the Bank of England embark on their own objectives in this area.

Before looking at the BOE’s intentions, it is important to recognise how technological advancements within China’s payment system have served as a template for the West.

China

In June 2019 the Brookings Institution published a report (Is China’s new payment system the future?) which outlined the extent to which two payment providers – Alipay and WeChat Pay – have fundamentally changed the way Chinese citizens interact with money.

China’s new system is built on the use of digital wallets and QR codes.

A wallet is used to store payment credentials, and is funded by transferring money electronically from one wallet to another or by directly linking it to a bank account. It works in a similar way to how Paypal operates, and is a feature of both Alipay and WeChat Pay.

Customers of both services are also assigned their own unique QR code to send a receive money. The way this works is that individuals and businesses each have a barcode that links to their banking details. When shopping at a store all a customer needs to do is scan the company’s QR code with their smartphone to make a payment. No direct use of a bank card or banking app is required.

Whilst consumers and businesses can make and receive payments through Alipay and WeChat Pay, there remains the need for each customer to link their account to a bank account. The Chinese model as it stands does not eliminate the need for commercial banks.

To appreciate the scale of the organisations we are dealing with here, Alipay runs through Alibaba (often referred to as the Chinese Amazon). It is part of a digital commerce platform and business oriented. WeChat Pay on the other hand operates through WeChat (regularly looked upon as China’s Facebook). Unlike Alipay, WeChat is a construct of social media. It is here where the majority of person to person payments are conducted.

Whereas Chinese consumers can utilise this new payment system on the high-street, in the UK it is not yet possible to pay for goods electronically through a digital wallet or QR codes. The prospect of Facebook launching their own payment system and currency (one that would incorporate digital wallets) may soon alter this dynamic. But provided such a system was designed to incorporate fiat currencies, a commercial bank account would still be needed to provide funds to the wallet.

Alipay and WeChat Pay are now so ingrained within Chinese society that together they form the largest payment system in the country. They are the primary payment methods, with debit cards and cash on the decline.

As the Brookings report mentions, payments are quickly migrating from China’s banking system into the country’s commerce system. Might the next technological advancement be that Alipay, WeChat Pay and Facebook move into the field of banking, challenging the role traditionally played by commercial banks?

A newly devised global currency, as espoused most recently by Bank of England governor Mark Carney, could act as a vehicle into making this a reality.

The Bank of England

It was in January 2016 that the BOE announced plans to develop a ‘blueprint‘ to modernise the UK’s RTGS (Real Time Gross Settlement) system. It would not be until May 2017 that the ‘blueprint‘ was made public and the process of creating a ‘renewed‘ RTGS officially began.

Two key reasons for renewing the system were presented by the BOE. One was to respond to ‘the changing structure of the financial system‘, the other to ‘build capacity to interface with new payment technologies‘. The latter was in part an abstract reference to distributed ledger technology (DLT).

As with the Federal Reserve’s planned ‘FedNow‘ system, ‘wider interoperability‘ was cited as a necessary feature for the next generation RTGS. Offering this would, according to the BOE, mean that the system would be able to ‘interface with distributed ledger technology in future‘.

In plain English, this means that the systems the Fed and the BOE want to implement will be able to connect seamlessly with not just banks but non-bank payment providers. And many of these non-bank organisations will specialise in DLT. As we already know, DLT is an intricate part of cryptocurrency technology.

Gradually, the BOE have been assuming more power over the UK’s payment systems. In November 2017 they began directly delivering CHAPS, a system used predominantly for financial market transactions. Prior to this CHAPS had been a private entity. But both the bank and the Financial Policy Committee (which is part of the BOE) declared that ‘financial stability would be enhanced by moving to direct delivery.’ It is all too common for central banks to use the financial stability argument as an excuse to extend their control over the financial system.

Because of the DLT element, non bank payment service providers will be an integral part of the ‘renewed‘ RTGS. But the BOE are not waiting for the implementation of the new RTGS to begin introducing these providers. Days before the EU referendum took place in June 2016, governor Mark Carney announced that the BOE now planned for non-bank PSPs to hold accounts at the BOE. With minds focused on the referendum, this passed by largely unnoticed.

A year later in 2017, the bank declared that they were now accepting applications from non-bank PSPs to hold settlement accounts in the BOE’s RTGS system. In April 2018, the first non bank provider gained access for the first time. That provider was TransferWise, a pioneer for the introduction of borderless accounts. Soon after Ipagoo, a Fintech firm who have since fallen into administration, became the first non-bank to be given direct access to CHAPS.

At the time, the BOE stated that ‘widening access to CHAPS and payment schemes that settle over RTGS will help to increase competition and innovation in the provision of payment services.’

To be granted access to RTGS requires the provider in question to be regulated by the Financial Conduct Authority. If we assume that the BOE were successful with their objective of converting all tangible assets into intangible assets, the whole payment system would become digitised and operate through the renewed RTGS. No provider, business or individual would have the ability to exist outside of the Bank of England’s purview. In large part this is already the situation. But in a cashless society featuring central bank digital currency, the BOE would be in total command. To say that permitting non bank PSPs access would increase competition masks the fact that the BOE would directly be controlling who can and cannot participate. Without the central bank, PSPs would have no way of offering a service.

This is an example of how central banks plan to maintain themselves at the forefront amidst the rise of fintech, and one reason why the idea of a ‘renewed‘ RTGS embodying a decentralised model is overblown.

This brings us neatly round to a speech Mark Carney gave at the Lord Mayor’s banquet at Mansion House in London, exactly seven days before the EU referendum took place. Titled, ‘Enabling the FinTech transformation – revolution, restoration, or reformation‘, Carney relayed several points that alluded to the true reasoning behind the BOE’s drive to reform RTGS. One of those was:

If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?

Distributing the ledger means multiple copies of the system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system.

What Carney was attempting to do was impart the idea that a distributed ledger would usher in an era of decentralised banking. In my view this is an inversion. Central banks have no intention of ceding their power base. The following quote from the same speech offers a reason why:

We need to be certain that the privacy of the data in those distributed copies cannot be compromised by cyber attack, not just in the future. One way this might be achieved is to limit the distribution of the ledger to existing trusted parties, such as other public sector entities.

So before a distributed ledger is even devised through RTGS, the Bank of England have been considering how to curtail its distribution, using data hacking as a strawman. Their rationale would likely be something along the lines of opening the ledger out to multiple different providers could jeopardise financial stability and heighten the risk of cyber terrorism.

If they were to limit access to the ledger, who exactly would the ‘trusted parties‘ be? And if cyber attacks became more common place under what the central banks would falsely claim to be a decentralised system, could that eventually manoeuvre the Bank of England into being the sole arbiter of that system, and with that, the ledger?

The stability of what Carney himself has called ‘new finance‘ (which would incorporate Fintech) would ultimately fall under the stewardship of the BOE. They would determine who could and could not participate.

As I have explored in previous articles, the overarching goal is for globalists to introduce central bank digital currency to supersede physical capital. A fact that Carney made reference to:

In the extreme, a DL (distributed ledger) for everyone could open the possibility of creating a central bank digital currency.

And you only have to look at the Bank of England’s actions to realise that steps are being taken to flesh out DLT as a future component of the ‘renewed‘ RTGS. In March 2018 the bank announced something called, ‘RTGS Renewal Programme Proof of Concept: Supporting DLT Settlement Models‘. They explained how the purpose of the proof of concept (POC) would be to understand the capability of ‘supporting settlement in systems operating on innovative payment technologies, such as those built on DLT.’

The four fintech participants of POC – Baton, Clearmatics, R3 and Token – all reported back to the BOE to confirm that their systems were able to connect and achieve settlement in central bank money. The BOE responded by saying that they would ‘continue to engage with fintech firms to keep up to date with innovation in payment technology.’

The bank also took the opportunity to confirm that they could ‘facilitate capability for the renewed RTGS service to interface with new technologies as and when they are developed to provide sterling payment services.’

A few months on from the POC, Victoria Cleland, who is Executive Director for Banking, Payments and Innovation at the Bank of England, remarked in a speech at the Technology and Innovation Risk Conference in London that the bank was renewing its payment infrastructure ‘through choice rather than necessity.’

This is a quote from Cleland I have laboured several times before, but I believe it demonstrates that the BOE’s strategy for devising a new payment system is part a carefully weighted goal to utilise distributed ledger technology as a precursor to introducing (or attempting to at least) central bank digital currency. Should that moment come, I suspect globalists will pronounce such an initiative as being in response to a major monetary crisis. In truth, plans for an all digital system have been in the works for decades. All a crisis of sufficient magnitude will do is provide central banks with cover to advance their objectives.

Whilst Cleland confirmed that the ‘renewed‘ RTGS would not be built on DLT, she made it very clear that the BOE were ‘working to deliver a service that has the capability to interact with DLT systems should demand emerge.’

The Bank of England want the reforms to RTGS complete by 2025. A short while ago they released a High-Level Indicative Programme Plan that charts the progress they intend to make. In May 2020 they plan to have contracted the technology delivery partner, and from there begin a four stage transition process that will culminate with RTGS having been transformed to accommodate DLT.

To take this conversation further, my next article on the subject of payment systems and digital currency will examine further communications from figureheads at the Bank of England and the Bank for International Settlements.