In early December 2016, the US Federal Reserve Board’s Divisions of Research & Statistics and Monetary Affairs released a discussion paper entitled “Distributed Ledger Technology in Payments, Clearing, and Settlement.”

The paper notes how 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. The paper examines 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. The authors state that DLT has the potential to provide new ways to transfer and record the ownership of digital assets; 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 transactions. These use cases could address operational and financial frictions around existing services.

Nonetheless, the paper notes that 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 in how issues around business cases, technological hurdles, legal considerations and risk management considerations are addressed.

View the discussion paper.