Blockchain and the Next Generation of Real-Time Settlement Solutions

Despite a range of successful trials and projects aimed to test blockchain-powered solutions, we are still a step or two away from the industry-wide implementation of distributed ledger technology in core banking infrastructure. Among the spheres where blockchain has particularly high expectations to meet is in payments, trading, the matter of financial inclusion, real-time settlement and more. Real-time settlement has recently been under the spotlight with Bank of England emphasizing the way blockchain can affect the next generation of real-time gross settlement (RTGS) solutions.

RTGS is the platform that underpins interbank transfers, and the BoE's RTGS handles transactions worth around £500 billion a day - equivalent to almost a third of Britain's annual economic output, as reported by Reuters. BofE in its analysis emphasizes three major ways distributed ledger technology will be relevant in RTGS:

  1. As a possible platform for core RTGS settlement;
  2. As a platform for externally-managed securities settlement DvP or foreign exchange PvP services that require access to central bank money;
  3. As a platform for a possible future digital currency that might need to interoperate with RTGS.

Another institution, Goldman Sachs, in its recent research has been emphasizing the size of the problem with current clearing and settlement systems, estimating that despite the relatively low transaction costs for securities such as equities, up to 10% of trades are subject to various errors, leading to manual intervention and extending the time required to settle trades.

By applying blockchain to the clearing and settlement of cash securities – specifically, equities, repo, and leveraged loans – we estimate the industry could save $11 - $12 billion in fees, OpEx, and capital charges globally by moving to a shorter, and potentially customized, settlement window. <...> blockchain could also potentially eliminate significant additional costs across FX, commodities, and OTC derivatives.

Why blockchain can become the core technology for RTGS

There are certain attributes of distributed ledger technology seen as the core enablers for various applications, including RTGS. Trust, resilience and shared state are crucial elements that banking professionals see at the foundation of successful blockchain application.

The trust arises from the consensus required to update the ledger, the resilience from the geographical and technical diversity of the network, and the shared state from being able to prove that a node is up-to-date, as Bank of England explains.

Out of the three pillars behind successful blockchain adoption, the most important benefit when applied to core settlement in an RTGS system is resilience, because, as explained in the analysis, trust is already created by the central bank operating as a neutral party, and state is managed through relatively simple reconciliations.

The ability to distribute nodes physically that may run different software implementations, combined with full data duplication across the network could potentially provide an RTGS system with strong defense against physical events and cyberattacks.

Work ahead

To keep with the pace of innovation adoption, the Bank of England said on Friday that it aimed to revamp the system that underpins British banking and trading in the City of London by 2020 to boost its defenses against cyberattacks and widen the number of businesses that can use it. Among the goals that BofE has for transformation is allowing forward-dated payments and creating an interface with blockchain technology "if/when they achieve critical mass," as reported by the Reuters.

BofE believes that the concept of the distributed ledger, though still in its infancy, is a potentially much more radical innovation, creating new ways for firms to exchange value without relying on central infrastructure. At the same time, however, the bank suggests that unlikely that this technology will prove sufficiently mature to form the core of the next generation of RTGS itself.