Central Banks Say Blockchain Could Shake Up Securities Settlement

A freshly published report from the European Central Bank and the Bank of Japan argues that distributed ledger tech (DLT) could be applied to produce novel securities settlement mechanisms, which includes “cross-chain atomic swaps” among unconnected ledgers.

The findings are the result of the central banks’ joint DLT investigation initiative, dubbed Undertaking Stella, which was released in December of 2016.

While intended to “lead to the broader debate about the usability of DLT,” this distinct period of the challenge examined “how the delivery of securities versus hard cash could be conceptually made and operated in a DLT atmosphere.”

The report focuses on the delivery vs . payment (DvP) securities settlement approach, in which assets are joined these types of that the transfer of 1 asset is executed if and only if the transfer of the other asset also takes place – this is also referred to as “atomicity.”

Researchers made 3 prototypes using 3 platforms: Corda, Elements and Hyperledger Material. In accordance to the report, they discovered that DvP could be executed in a DLT system with hard cash and securities on each a single ledger and among separate ledgers.

“Conceptual evaluation and experiments have proven that cross-ledger DvP could perform even with no any relationship among individual ledgers – a novelty which does not exist in today’s set-up,” the report states, likely on to demonstrate:

“Functionalities these types of as ‘cross-chain’ atomic swaps have the likely to assist ensure the interoperability among ledgers (of possibly the same or various DLT platforms) with no essentially requiring connections and institutional arrangements among them.”

Nonetheless, the report also cautions that cross-ledger DvP programs could increase complexity and operational troubles to settlements. For instance, DvP transactions among unconnected ledgers would necessitate “a number of system actions and interactions among the seller and the customer,” it states.

Likewise, these types of a system could affect transaction pace and “need the momentary blockage of liquidity.” The absence of system synchronization could also “expose contributors to principal possibility if 1 of the two counterparties does not total the necessary system actions,” the scientists added.

In truth, the conclusion that the technology isn’t really prepared to change settlement programs was highlighted in final September’s report on Undertaking Stella.

As these types of, the report concludes, “even further evaluation on the safety and efficiency of individual ways [to applying DLT to DvP arrangements] is warranted,” in addition to a comprehensive legal evaluation, which is further than the scope of the present challenge.

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