Central banks and financial institutions must carefully consider the potential savings and efficiencies of using Blockchain and other distributed ledger technology along with its risks in payments, clearing and settlement, warns global payments regulator, Bank for International Settlements
In a report, the Bank for International Settlements’ Committee on Payments and Market Infrastructures calls on central banks and other authorities to analyse the use of Blockchain in the ‘financial plumbing’ underpinning the operation of financial markets.
Blockchain is a digital ledger of transactions. Instead of everyone keeping their own records, it is mutual, with everyone involved sharing the same ledger of transactions. It operates by consensus, so if all parties agree that a transaction is legitimate, it is then added to the chain and cannot be altered after the fact.
The report focuses on the implications of the technology for efficiency and safety and for the broader financial market. It contains a set of key questions that may be useful to authorities and others to consider when looking at Blockchain and distributed ledger arrangements.
These include speed and cost of processing, speed and transparency of reconciliation, cost of credit and liquidity management, operational and security risk.
Earlier in February, analysis from consultancy Infosys suggested 80% of bankers expect Blockchain to be adopted by the sector by 2020.
Already, more than 50 major banks worldwide including Citi, JP Morgan, BNP Paribas, Deutsche Bank and HSBC have banded together in a group called R3 CVE to test the technology.
For auditors, it could potentially make verifying the legitimacy of transactions far simpler and help flag up unusual activity, a subject CCH Daily explored this month in an in-depth feature.
‘Distributed technology could become a game changer for payment, clearing and settlement activities if fintech companies and financial institutions can leverage the technology to meet demanding legal, operational and risk management requirements,’ said committee chair Benoît Cœuré, also a member of the executive board of the European Central Bank.
‘Central banks have traditionally played an important catalyst role in payments and settlements. This report will help central banks, other authorities and the public identify the risks as well as the benefits associated with the emerging technology, which could be the basis for next-generation systems.’
The report from the Bank for International Settlements’ Committee on Payments and Market Infrastructures can be read here.
