As many readers already know from previous articles, I am skeptical about the idea that Brexit would leave the U.K. economy relatively unharmed. I simply doubt that leaving the world’s biggest trading block can be achieved while keeping all the advantages — free movement of goods, services and capital — and rejecting what the proponents of Brexit see as a disadvantage — free movement of people.
I get emails from readers telling me to cheer up, and believe me, I try to. Today, for the first time since the vote, I found a piece of news that does indeed cheer me up: a Financial Times story revealing that big banks plan to create a new standard to clear and settle financial trades using blockchain, the technology supporting the Bitcoin electronic currency.
This could potentially mean that the relatively new technology used by Bitcoin could make a significant difference to the outcome of Brexit for the U.K. economy, at least for one of the most important sectors: banking.
First, a bit of context: one of the main reasons why virtually all the big banks in London — the City, as London’s financial services sector is known — supported remaining in the European Union is the fact that clearing of euro-denominated trades must be done within the EU. Leaving the EU will deal a blow to the U.K.’s financial services.
I was among the first to warn about this danger in an article back in December. If you remember, the European Central Bank (ECB) insisted in a rule issued in 2011 that clearing of euro-denominated trades should be done in countries that have the euro as their currency. London challenged the rule in court, arguing that it discriminates between EU members — and it won.
Out of the EU, London would automatically lose the right to clear euro-denominated trades — unless, of course, it manages to negotiate some form of exception, but this would probably involve having to agree with the unpalatable freedom of movement.
This is where blockchain comes in. According to the Financial Times article, four of the world’s biggest banks — UBS (UBS) , Deutsche Bank (DB) , Santander (SAN) and BNY Mellon (BK) , together with broker ICAP IAPLY, teamed up to create a sort of “utility settlement coin” and pitch the idea to central banks.
Such a settlement method would eventually mean that trades anywhere could be recorded and cleared electronically, safely and quickly. Therefore, there would be no actual need, at least technically, for clearing house to be based in a certain jurisdiction. The paper said the four banks hope to have a commercial solution ready by 2018.
This would be just in time for London-based banks. If the U.K. triggers Article 50 of the EU Treaty, which is the official notification that it wants to leave the block, early next year as Prime Minister Theresa May suggested, it has two years to negotiate its withdrawal. This technology, if indeed it turns out to be what it promises to be, could give a strong advantage to the City of London. Banks will be able to argue that they no longer need to move their headquarters to Frankfurt or Paris, since they can have a direct link with the ECB from London, with the help of this technology.
Of course, this is highly speculative, and would anyway only solve part of the problem that Brexit poses to banks in the U.K. The technology still doesn’t mean that banks will keep their “passporting” rights — the right to offer their services in the EU — if the U.K. leaves, as this is a matter of regulation not technology. Also, the ECB is usually more conservative than other central banks, and it is not certain it would even consider the technology.
However, the importance of the financial services industry to the U.K. cannot be understated. According to statistics from the City of London Corporation, an organization promoting London’s role as a financial powerhouse, the financial services sector produces 9.6% of U.K. output, with associated professional services contributing an additional 4.9%.
Britain is the biggest exporter of financial services in the world and the financial sector employs around two million people overall in the U.K. Any news that could potentially mean that Brexit would not hit this vital industry too hard is definitely something worth cheering.