The Clearing House Automated Payment System (CHAPS) is the UK's same day high value payment system. At the moment ;) CHAPS is the only UK payment system that guarantees real time finality, on any value, in 'Central bank money' as each payment instruction settles.
Launched over 32 years ago, the CHAPS system guarantees same day settlement finality for payments of any value. Since 1996, CHAPS has used an enhanced Real Time Gross Settlement (RTGS) system where each individual payment is settled in real time across its Direct Participants’ settlement accounts at the Bank of England.
Most of the daily value processed by CHAPS is from wholesale transactions where CHAPS acts as the portal through which international sterling flows take place. CHAPS is used by banks, building societies and other payment service providers to pay each other. However, it is most generally known within the UK as the payment method for house purchases, although this represents only a fraction of 1% of the daily value processed.
A staggering ,£68 trillion was processed through the system in 2015. As of July 2011 the total value processed since the start of CHAPS exceeded one quadrillion (£1,000,000,000,000,000) pounds.
The main uses of CHAPS include in property / real estate
- By solicitors / licensed conveyancers to transfer the purchase price of a house between the bank accounts of those involved.
- By individuals buying or selling a high-value item, such as a house or car.
Though things are about to change Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy.
The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority.
The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.
“Whoever reacts too slowly to these developments is going to take it on the chin. They will lose their businesses,” said Dr George Danezis, who is working on the design at University College London.
"My advice is that companies should play very close attention to what is happening, because this will not go away," he said. Layers of middlemen in payments systems face a creeping threat across the nexus of commerce, stockbroking, currency trading or derivatives. Many risk extinction over time.
“Deep in the markets there are dark pools buying and selling shares, and entities that facilitate that foreign exchange. There are Visa, Master, and PayPal. These are the sorts of guys that we are going to disrupt,” he said.
University College drafted the plan after being encouraged by the Bank of England last year to come up with a radical design for a secure digital currency. The Bank itself has an elite four-man unit grappling with the implications of crypto-currencies and blockchain technology.
Central banks at first saw Bitcoin as a rogue currency and a threat to monetary order, but they are starting to glimpse ways of turning the new technology to their advantage.
The findings of the University College team were delivered to the Network and Distributed System Security Symposium (NDSS) in San Diego, revealing for the first time what may be in store. Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme.The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the 'trust' factor of state authority. It would have the incumbency benefits of an established currency behind it.
Government urged to use Bitcoin-style digital ledgers, could help issue land registry property title deeds
Government urged to use Bitcoin-style digital ledgers, could help issue land registry property title deeds
"It seems very unlikely that, to any significant extent, we'll ever be paying for things in Bitcoins, rather than pounds, dollars, or euros," said Ben Broadbent, the Bank of England's Deputy Governor. There were an estimated $5bn of Bitcoin transactions in the US last year, a remarkable phenomenon but a trivial sum in the greater scheme of things.
Mr Broadbent said the attraction is the settlement mechanism used by Bitcoin, the so-called 'distributed ledger'. "The function goes right to the heart of what central banks do," he said in a speech earlier this month.
Bitcoin is inherently limited, a niche for aficionados and the ideological heir's of the 19th Century 'free banking' movement. Its code restricts it to a limit of 21 million Bitcoins, and it can handle only seven transactions per second. "It is a Peter Pan system, and it doesn't really grow up," said Dr Danezis.
Critics say it is also vulnerable to "double spending attacks", a form of manipulation where the same money is paid to two different people. One of them is tricked and receives nothing. The victim has no legal recourse.
University College's RSCoin is safer, faster, and far less less volatile. It can scale up indefinitely. Its beauty is that it cuts out the middleman, and reduces costs to a wafer thin level.
Bitcoin
Bank of England says Bitcoin is too volatile to gain trust
Mr Broadbent said such a currency could greatly widen the balance sheet of a central bank, hinting that the system could be designed in such a way that ordinary people could by-pass the commercial banks and hold balances directly with the Bank of England - a staggering concept. "It's likely you'd see money moving out of existing deposits," he said.
Mr Broadbent said the system could in principle be used to cover government services, tax collection, and benefit payments. It is more likely to start with the settlement of bonds and equities, and for exchanges and clearing houses.
The settlement systems used by central banks – CHAPS, TARGET2, and Fedwire – are expensive and rely on stagnant technology. The UK-based CHAPS system handled £68 trillion of transactions last year.
CHAPS transfers are relatively expensive, with banks typically charging as much as £35 for a transfer. The cost of fast transfers and the low speed of free transfers (such as BACS) is sometimes a subject of controversy in the UK, although low value transactions are now available from its Faster Payments Service.
Problems can arise from delays, e.g. when an exceptional workload at a bank results in the money being cleared too late in a working day to complete related transactions, or inadequate instructions, when a bank is not given sufficient information to know where to credit the money, or in human delay in operating the machines
RSCoin may be irresistible for central banks. Dr Danezis said it is allows them to turn the money tap on and off with calibrated precision, and lets them track the sort of counterparty liabilities that nearly blew up the financial system during the Lehman crisis. "There would be instant visibility. They could react very quickly in an emergency, " he said.
Ultimately it could achieve some of the objectives of 'narrowing banking' proposed by Adam Smith, or the Chicago Plan put forward by US economists in the 1930s - but never enacted - to transfer control of money creation from private banks to the state. Arguably, this would make the financial system safer and less prone to boom-bust cycles.
Dr Danezis said there are three big centres of research and innovation into the fast-moving area of 'Fintech' and crypto-currencies. The City is at the cutting edge. "The game is between London, New York, and Silicon Valley in California," he said.
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