Distributed Ledger Technology in Payments, Clearing, and Settlement

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 processes, including how funds...

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Bibliographic Details
Published in:Policy File 2016
Main Authors: Mills, David, Wang, Kathy, Malone, Brendan, Ravi, Anjana, Marquardt, Jeff, Chen, Clinton, Badev, Anton, Brezinski, Timothy, Fahy, Linda, Liao, Kimberley, Kargenian, Vanessa, Ellithorpe, Max, Ng, Wendy, Baird, Maria
Format: Report
Language:English
Subjects:
Banking/Finance
Board of Governors of the Federal Reserve System
Information technology
Online Access:Request full text
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Summary: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 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 payments, clearing, and settlement 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 to transfer and record the ownership of digital assets; immutably and securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants, and cryptography. Potential use cases in payments, clearing, and settlement 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'sunderstanding 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 in 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 30 organizations, including financial institutions, financial market infrastructures, technology start-ups, established technology firms, and other government agencies.