Rob, you've written an article on the emergence of digital currencies like Bitcoin, and the
developments in payment technologies which underpin them. Now before coming on to discuss
this further, could you talk us through an electronic payment with a traditional currency
such as sterling. Well if we start by thinking about what money is, money in modern economies
typically takes the form of banknotes and coins, and in the vast majority of cases,
deposits held in bank accounts. These are digital records of money balances, essentially
they only exist as data in a computer. Making payments is a matter of agreeing a system
to make changes to these records securely. So let's take a very quick example. Imagine
Anne wants to transfer money to Fred electronically. Let's assume they use different banks, in
which case the payment goes from Anne's bank to Fred's via some central entity, typically
a central bank and the Bank of England sits at the centre of most payment systems in the
UK. Increasingly people want to make payments online or on the move, and your article discusses
some recent innovations which allows people to make payments in a more convenient way.
Yes. This includes services like Paym in the UK which allows users to access existing payment
systems using their mobile phones, and M-Pesa in Kenya, which also uses mobile phones but
the difference is that M-Pesa users don't need access to a bank account. These systems
still rely on a trusted central entity, be it a bank or a mobile phone company. Most
recently digital currencies have emerged which are structurally different to other innovations.
Your article explains what digital currencies like Bitcoin are, and how they work. That's
right, and a key point to note is that digital currency is both a payment system and a currency.
This can get lost because a lot of the media attention focuses on swings in the price of
the currency but the real innovation is the decentralised payment system. To see this,
if we go back to the example that Anne wants to transfer money to Fred, but this time she's
transferring a digital currency like Bitcoin. This is paid direct from Anne to Fred, there
are no banks involved. Without a central third party, there needs to be a secure way for
everyone to agree changes to the ledger, since digital information is, in principle, easy
to change and copy. Digital currencies overcome this by making it possible for a reliable
copy of the ledger to be distributed to everybody in the system. This rethinking of payments
is made possible by combining existing technologies like the internet, cryptography and high volume
data storage. The article explains how this works in more details. So a key difference
then is that whereas centralised systems rely on everyone to trust some third party to keep
a digital record that's correct. A Bitcoin transaction relies on many copies of this
digital record which are distributed to many users across the network. That's right, and
this means you don't have to rely on the trustworthiness of any single entity, just that the cryptography
works. You also discuss some possible applications of the distributed ledger technology beyond
payments, what are some of these possibilities? Like money, most financial assets are just
digital records, so for example if you own a share in a company, you don't have a physical
certificate anymore. What you actually own is a record in a database managed by a trusted
third party. We don't make any predictions about this in the article, but we make the
point that given these records are already digital, it is at least conceivable that over
time, the centralised structures of the financial system could gradually be replaced by decentralised
systems. So how does this affect the Bank of England? Given its role in protecting monetary
and financial stability in the UK, the Bank monitors closely any developments in new technology
as well as any risks posed to its objectives. Rob, thanks very much. Thanks