Since the innovative space of the fintech sector is seeing an unprecedented amount of blockchain application, the US Federal Reserve published a paper on the exploration of the new technology. The paper is under the Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. and is titled, Distributed ledger technology in payments, clearing, and settlement.
The Distributed Ledger Technology (DLT) is the current functional trend in transforming payment, clearing, and settlement (PCS) processes, and how funds are transferred. Securities, commodities, and derivatives are cleared and settled at faster rates with DLT, and even eliminate operational and financial inefficiencies.
The paper states:
“The driving force behind efforts to develop and deploy DLT in payments, clearing, and settlement is an expectation that the technology could reduce or even eliminate operational and financial inefficiencies or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets. The purported benefits of DLT that could address these frictions, including improved end-to-end settlement speed, data auditability, resilience, and cost efficiency, have led industry participants to investigate the application of DLT to a wide variety of PCS processes.”
While the research paper goes into the possibilities of DLT and how it can streamline and revolutionize financial systems, it states that some industry participants caution that real-world applications are years away from full implementation. However, the paper also clearly suggests that it would be prudent to stay ahead of the curve and pay attention to the many new proofs of concept (PoCs) that are cropping up with new ventures, and to heed announcements made by other industry professionals that DLT will be used within the next year or two with real working projects.
The Federal Reserve’s Interest in DLT:
“As part of its core objective to foster the safety and efficiency of the payment system and to promote financial stability, the Federal Reserve has a public policy interest in understanding and monitoring the development of innovations that could affect the structural design and functioning of financial markets.”
The Federal Reserve formed a research team consisting of a multidisciplinary group of officers and staff from the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, and the Federal Reserve Bank of Chicago. This Federal Reserve staff (FR research team) conducted interviews and conversations with 30 key industry stakeholders, including market infrastructures, financial institutions, other government agencies, tech start-ups, established tech firms, and industry consortia to suss out DLT implications. Through research discussions with parties that are interested in, participate in, or are contributing to the evolution of DLT, this published paper confirms that blockchain technology is being heavily regarded within the U.S. Federal Reserve.
“Finally, as a recent innovation, DLT has the potential to also drive change to the financial market structure in ways that take advantage of the new technology. Although it is too soon to predict what these changes may be, the way that the industry finds use cases and addresses the challenges identified in this paper will provide clarity over time. As the technologies and experimentation with these technologies continue to develop, it will be important to thoroughly understand how these changes apply broadly. Understanding the potential range of DLT adoption and its link to changing the financial market structure is an area for future research.”