Central Banks Say Blockchain Could Shake Up Securities Settlement

Central Banks Say Blockchain Could Shake Up Securities Settlement

A newly published report from the European Central Bank and the Bank of Japan argues that distributed ledger tech (DLT) could be used to create novel securities settlement mechanisms, including "cross-chain atomic swaps" between unconnected ledgers.

The findings are the result of the central banks' joint DLT research initiative, dubbed Project Stella, which was launched in December of 2016.

While intended to "contribute to the broader debate around the usability of DLT," this particular phase of the project examined "how the delivery of securities against cash could be conceptually designed and operated in a DLT environment."

The report focuses on the delivery versus payment (DvP) securities settlement method, in which assets are linked such that the transfer of one asset is executed if and only if the transfer of the other asset also occurs - this is also referred to as "atomicity."

Researchers designed three prototypes using three platforms: Corda, Elements and Hyperledger Fabric. According to the report, they found that DvP could be executed in a DLT system with cash and securities on both a single ledger and between separate ledgers.

"Conceptual analysis and experiments have proven that cross-ledger DvP could function even without any connection between individual ledgers - a novelty which does not exist in today's set-up," the report states, going on to explain:

"Functionalities such as 'cross-chain' atomic swaps have the potential to help ensure the interoperability between ledgers (of either the same or different DLT platforms) without necessarily requiring connections and institutional arrangements between them."

However, the report also cautions that cross-ledger DvP systems could add complexity and operational challenges to settlements. For example, DvP transactions between unconnected ledgers would necessitate "several process steps and interactions between the seller and the buyer," it says.

Likewise, such a system could affect transaction speed and "require the temporary blockage of liquidity." The lack of system synchronization could also "expose participants to principal risk if one of the two counterparties does not complete the necessary process steps," the researchers added.

Indeed, the conclusion that the technology isn't ready to replace settlement systems was highlighted in last September's report on Project Stella.

As such, the report concludes, "further analysis on the safety and efficiency of individual approaches [to applying DLT to DvP arrangements] is warranted," in addition to a full legal analysis, which is beyond the scope of the existing project.

Connected chains image via Shutterstock

27.03.2018 / 10:20 18
Deutsche B?rse Plans Blockchain Securities Platform with R3 Tech Deutsche B?rse Plans Blockchain
Deutsche B?rse Group, the Germany-headquartered securities listing and trading exchange, is planning to develop a blockchain-based system for
Japan Quietly Hosted a Blockchain Roundtable for Central Banks, Regulators Japan Quietly Hosted a Blockchain
Japans Financial Services Agency (FSA), the countrys financial regulator, has revealed details of a closed-doors roundtable between regulators and
Worlds Central Bank: Crypto Could Risk Bank Runs Worlds Central Bank: Crypto Could Risk
How many central banks are actually considering their own version of cryptocurrency is unclear, Russia and Venezuela being the most infamous
Bank For International Settlements Distances Itself From Centralized Digital Currencies Bank For International Settlements
European banking bigwigs appear to be underwhelmed by the idea of digital currency, either decentralized or bank-issued. A new joint European banking
European Banks Complete First Live Securities Transfer On R3s Blockchain Platform European Banks Complete First Live
Financial service groups Credit Suisse and ING have completed the first successful transfer of about $30 mln in securities on R3s blockchain
South Africas Central Bank Launches Ethereum-Based Blockchain PoC South Africas Central Bank Launches
The central bank of South Africa has launched a new proof-of-concept (PoC) project to replicate interbank settlements on an Ethereum-based
Comments (0)
Add a comment
Comment on