The Bank of England, with Ripple, have tested the Interledger Protocol as part of the BoE’s ‘FinTech Accelerator Proof of Concept’. This PoC explored the synchronised settlement of payments of:
- two different currencies
- in two different simulated Real Time Gross Settlement (RTGS) systems.
BoE and RTGS
The BoE has recently started a programme of work to replace the UK’s Real Time Gross Settlement (RTGS) service. This is where financial institutions hold their sterling bank accounts. Financial institutions:
- store balances (sometime known as reserves) in these accounts
- use the balances to make payments.
The Bank of England has operated RTGS since 1996 in order to provide a safe and immediate way for banks to exchange payments. Unlike before 2006, it now pays interest on reserves held in RTGS. Thus RTGS supports the implementation of monetary policy as set by the Monetary Policy Committee.
In May 2017 the BoE set out a vision for a renewed service. It explained it planned to introduce new functionality to support the ‘synchronisation’ of cash movements made in RTGS with the movement of cash and assets held in other systems in the next generation of RTGS. It stated that it needed a more detailed analysis of the benefits and costs of the different technical options.
The Interledger Protocol PoC forms part of that analytical process. It used a simulated RTGS system. For the record there was complete segregated for the PoC from the BoE’s core systems.
The Interledger Protocol and Ripple
The Interledger Protocol is an open protocol suite for sending payments across different ledgers. Like routers on the Internet, connectors route packets of money cross independent payment networks. It provides for ‘routing payments across different digital asset ledgers while isolating senders and receivers from the risk of intermediary failures. Secure multi-hop payments and automatic routing enables a global network of networks for different types of value that can connect any sender with any receiver.
According to Interledger.org: “The interledger protocol is intentionally limited in scope to provide the functions necessary to deliver a payment from a source to a destination over an interconnected system of ledgers. It includes minimal requirements for underlying ledgers. It does not include public key infrastructure, identity, liquidity management, or other services commonly found in payment protocols.
“This protocol is called on by hosts through higher level protocol modules in an interledger environment. Interledger protocol modules call on local ledger protocols to carry the interledger payment to the next connector or destination account.
“For example, a Simple Payment Setup Protocol (SPSP) module would call the interledger module with the address and other parameters in the interledger packet to send a payment. The interledger module would send a transfer to the next connector or destination account along with the interledger packet and according to the parameters given. The transfer and interledger packet would be received by the next host’s interledger module and handled by each each successive connector and finally the destination’s SPSP module.”
By its nature The Interledger Protocol is an open architecture and minimal protocol to enable interoperability for any value transfer system. The Interledger Protocol is not tied to any one company, blockchain, or currency. It originated inside Ripple.
The Proof of Concept
This BoE PoC focused on a high-value cross border payment scenario in which transactions in two different currencies executed simultaneously in two different simulated RTGS systems. These represented two different countries.
The key objectives were to:
- determine whether the Interledger Protocol could provide a suitable technical solution to the scenario
- explore situations in which the synchronised settlement process does not complete (if, for example, there is an inability to make a payment) as well as understand potential ways of responding
- build an understanding of the technical challenges associated with both synchronisation and the Interledger Protocol.
The Boe used a Ripple solution built around the open source Interledger Protocol. This enables payments across different ledgers and networks across the world. In this context, a ledger is essentially a file used to record transactions measured in terms of a monetary unit of account.
Ripple Connect acted as the interface to enable an institution’s internal systems to integrate with the Ripple network. Payment instructions were sent and received. It was also possible to query the state of payments. The PoC also used the ILP Validator network to coordinate the settlement of payments between the transacting ledgers. This ‘is’ the source of truth regarding the success or failure of payments.
The BoE summarised the results as: “We successfully integrated the Ripple solution with two simulated RTGS systems, hosted in the cloud. … We demonstrated that we could process a successful cross-border payment across two RTGS systems simultaneously. We also demonstrated that an attempted cross-border payment that failed validation on the receiving side would not be honoured.”
For the BoE this PoC was an exercise to develop the Bank’s understanding of synchronisation and possible technical solutions. Its key learning points were:
- the Interledger Protocol is able to support synchronisation of payments between two simulated RTGS ledgers
- the ILP Validator created a single source of truth between the two ledgers (thereby eliminating the need for separate processes such as mutual reconciliation between separate ledgers
- cross-border payments, when applied to wholesale markets, present different challenges compared to retail and corporate transactions (which Ripple designed its product to handle); availability of liquidity is one such challenge.
What does it mean?
This is big news. One of the inherent problems with blockchain has been ‘interblockchain’ operation. There has been much theory and little practice.
In this PoC the BoE pitted the Interledger Protocol against one of its most important financial tools – the RTGS. Though executed away from live systems (thank goodness) the simulations proved interledger processing is possible, albeit with the caveat that the retail/commercial Ripple product is not ideal in an environment like RTGS.
Enterprises should watch for more BoE progress with blockchain and the Interledger Protocol. If it can satisfy the BoE it is likely to be sufficient for businesses.