UK Parliament Considers Effects of Blockchain on Bank Solvency

A UK Parliament discussion of a bill relating to financial services regulation has raised questions about how bank liquidity and solvency should be monitored in the face of new technologies such as blockchain.

Introduced in 2015, the "Bank of England and Financial Services Bill" aims to reassess how the central bank should be organized to exercise its mandate on the issue. Of interest during an 11th February meeting was a clause relating to the handling of prudential regulation, or laws that attempt to ensure that domestic financial institutions are financially healthy and able to withstand operational shocks.

One issue discussed during the meeting was how the bill proposes that the role of the Prudential Regulatory Authority (PRA), a financial services regulatory body created in response to the financial crisis, should be altered so that it would function as a committee.

The Bank of England is already the parent organization of the PRA, though some members of Parliament worry that any increased oversight would perhaps lead to the same issues the agency was created to solve.

Writing on the issue was Richard Burgon, a legislator with the British Labour Party who argued that the clause would undermine the authority of the PRA at a time when smaller financial services companies, such as blockchain companies, are becoming more integral to the health of the overall British economy.

Burgon wrote:

"With the creation of new starter banks, there is a greater need than ever for microprudential regulation as those institutions start up in business. If we continue to start new credit unions and new blockchain banks and so on, microprudential regulations remain fundamentally important."

Burgon’s comments were echoed by other members of Parliament including George Kerevan, who along with Burgon, was one of seven MPs that voted against allowing the clause to stand. In total, the clause received 10 votes that it should stand as part of the bill.

With the approval, the bill will head to the committee stage in the House of Commons, with the next meeting scheduled for 23rd February.

New uncertainties

The comments come amid a growing focus on how prudential regulators may or may not be taking steps to ensure markets aren’t destabilized by blockchain-based technologies.

For example, the topic was discussed at The North American Bitcoin Conference (TNABC) in Miami by industry legal authorities, who suggested that similar conversations may be ongoing between major banks and other prudential regulatory authorities, such as the Office of the Comptroller of the Currency (OCC) in the US.

The process, they suggested, could lead to the creation of frameworks such as Basel III, voluntary regulation that oversees bank capital requirements and liquidity, though they said much of this debate was unlikely to be made public.

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