DLT for Securities Settlements Feasible but Complex BoJ & ECB Conclude

The European Central Bank and the Bank of Japan together explored the feasibility of using distributed ledger technology (DLT) for delivery-versus-payment (DvP) in securities settlement in a joint study.

The recently released paper outline the research project dubbed 'Project Stella,' is the second phase of the combined study. In the first part, the banks concluded that DLT-based payment systems lack maturity for deployment in a large-scale payment environment such as BOJ-NET and Target2.

In phase two, the banks examined “ways in which DvP can be conceptually designed and technically achieved in a DLT environment drawing on existing DvP models as well as innovative solutions that are being discussed for distributed ledgers”.

The banking institutions concluded that although the implementation of the nascent technology is possible for such settlements, certain complexities might arise due to the concrete design of DLT-based arrangements.

The researchers even designed DLT-based prototypes on three renowned Blockchain Blockchain Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Read this Term-based solutions targeted to the financial institutions - Corda, Elements, and Hyperledger Fabric - to get a better understanding of the DvP arrangements.

The primary findings suggest that DvP could be conceptually and technically designed in a DLT environment with cash and securities either on the same ledger (single-ledger DvP) or on separate ones (cross-ledger DvP.) Much depends on the interaction with other post-trade infrastructures and the range of information being shared across participants.

However, due to the rigidity of the DLT-based design, complications might arise, which could further initiate other complexities in the process. Moreover, the banks are claiming that the rigid design will hamper transaction speed and available Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term, and also give rise to risks from gaps in synchronization.

"Given that discussion on applying DLT to DvP arrangements are still at an early stage, further analysis on the safety and efficiency of individual approaches is warranted. Also, legal aspects, which have not been part of this study, would need to be further explored," the banks stated.