The research paper covers the use of the distributed ledger technology in the financial industry, its potential benefits and challenges.

The report “Distributed ledger technology in payments, clearing, and settlement” has been created by a team of Fed experts in cooperation with analysts from the Federal Reserve Banks of New York and Chicago.

According to the paper, the technology has the ability to create new ways of storing, recording and transmission of digital assets. However, currently, the majority of financial market participants are looking to integrate it into the existing traditional systems and financial infrastructures. “Many models may alter or eliminate some roles of current intermediaries in payments, clearing, and settlement but may not necessarily eliminate the need for coordination or centralization of certain functions by trusted intermediaries,” it reads.

Among the principal advantages of the technology the research points out the following:

• Reduced complexity (especially in multiparty, cross-border transactions)
• Improved end-to-end processing speed and availability of assets and funds
• Decreased need for reconciliation across multiple recordkeeping infrastructures
• Increased transparency and immutability in transaction recordkeeping
• Improved network resiliency through distributed data management
• Reduced operational and financial risks

Every financial company planning to develop or/and implement a blockchain solution needs to identify appropriate use cases where the potential cost reduction and performance improvement would justify investment in the new technology. In addition, a widespread adoption of the technology among the financial market players is necessary: before it triggers the network effect, operating costs of blockchain implementation may exceed its potential benefits.

Other key technological challenges that need to be considered are scalability, standard-based protocols able to provide interoperability, effective management of cryptographic keys and access credentials, data checking, and legal framework (including licensing).

The distributed registry technology is still in the initial stage of development, and, given various challenges associated with it, it is too early to predict what kind of changes it may bring to the traditional financial market.

Elena Platonova