European Central Bank Advises Interoperability For Distributed Ledger Protocols

A recently released report from the European Central Bank (ECB) suggests that distributed ledger technology (DLT) requires a layer of interoperability with non-DLT systems to be viable.

The report titled The Potential Impact of DLTs on Securities Post-Trading Harmonisation and on the Wider EU Financial Market Integration was made to the ECB by the International Capital Market Association's Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) and spans 134 pages. Of its findings on interoperability, the report states:

"If DLT and non-DLT solutions are to coexist, interoperability between the two approaches needs to be ensured. There may be a need to provide ad hoc matching fields where a participant holds both a DLT and non-DLT account."

In August of 2017, the Bank of England (BoE) issued a similar report studying DLT economics. Among other findings, the report highlighted a necessity for public authorities and regulatory agencies to facilitate cooperative efforts for researching DLT. Prior to that, in May of 2017, the BoE issued a document that classified DLT as an insufficient means for administering real-time gross settlements, citing a lack of maturity in the technology.

The AMI-SeCo report indicates that the existing ISO 20022 standard governing interchange of electronic data between financial institutions may require modifications, given the possible integration of executable distributed code contracts, or smart contracts. It recommends that the marketplace "may want to consider ISO 20022 extension into smart contract initiation and coding, as well as DLT-specific concepts."

As banks continue to explore the benefits of the technology underpinning cryptocurrencies, it is likely that lattices of interoperable infrastructure will rise up as result of this research. These lattices may be the foundation for connecting legacy substructures to the new system, thus allowing the benefits of DLT and blockchain platforms to be employed by financial institutions.