Distributed ledger technology in payments, clearing and settlement

David Mills, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquardt, Clinton Chen, Anton Badev, Timothy Brezinski, Linda Fahy, Kimberley Liao, Vanessa Kargenian, Max Ellithorpe, Wendy Ng and Maria Baird

Abstract

Digital innovations in finance, loosely known as “fintech”, have garnered a great deal of attention across the financial industry. Distributed ledger technology (DLT) is one such innovation that has been cited as a means of transforming payment, clearing and settlement (PCS) processes, including how funds are transferred and how securities, commodities and derivatives are cleared and settled. An important goal of this paper is to examine how this technology might be used in the area of PCS, and to identify both the opportunities and challenges facing its practical implementation and possible long-term adoption. DLT has the potential to provide new ways of transferring and recording the ownership of digital assets; immutably and securely storing information; providing for identity management; and facilitating other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants and cryptography. Potential use cases in PCS include cross-border payments and the post-trade clearing and settlement of securities. These use cases could address operational and financial frictions around existing services. Nonetheless, the industry’s understanding and application of this technology is still in its infancy, and stakeholders are taking a variety of approaches toward its development. Given the technology’s early stage, a number of challenges to development and adoption remain, including how issues around business cases, technological hurdles, legal considerations and risk management considerations are addressed. To understand fast-moving developments in this area, a team of Federal Reserve staff conducted a series of discussions with approximately thirty organizations, including financial institutions, financial market infrastructures, technology start-ups, established technology firms and other government agencies.