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Federal Reserve Governor Cautions Against Early Adoption Of Distributed Ledger Technologies

Speaking at the Institute of International Finance Blockchain Roundtable, Washington, D.C., Federal Reserve governor Lael Brainard discussed the use of distributed ledger technologies in payment, clearing, and settlement.

Brainard said that currently there is a lot of excitement about the potential of blockchain and distributed ledger technologies to achieving greater efficiency and to reduce costs and frictions, such as those associated with collateral management and custodial services, reduce settlement risk, enhance security, increase transparency, and offer new services. 

Although he is optimistic about the technology, he noted the concerns about the costs and risks from the early adoption of rapidly evolving and uncertain technologies, as well as technological hurdles in integrating new technologies into legacy systems and achieving interoperability across different ledgers and networks. Brainard pointed out that while realizing the full potential of distributed ledger technologies could take many years, there are also questions about the need for sizeable new investments to obtain capabilities like real-time processing where these capabilities already exist at some of the industry's core infrastructures.

“Important technological challenges will need to be addressed to permit widespread adoption and migration away from legacy systems and networks. These include the need for standardization, the development of protocols that will permit interoperability between other ledgers and networks, and the reduction of computational intensity and costs”, he added.

Brainard also acknowledged the ongoing experiments conducted by many industry participants with distributed ledger technology in controlled, permissioned environments. However, he warned that the resulting highly fragmented shared systems may lead to unintended consequences.

“If some of these experiments bear fruit, it will be important to address the challenge of how they would scale and achieve diffusion”, he said. “Determining exactly how the different distributed ledger technologies interoperate with each other, and legacy systems, will be critical. New and highly fragmented "shared systems" may create unintended consequences even as they aim to address problems created by today's siloed operations”.

He said that the Federal Reserve Board has established a multi-disciplinary working group that is engaged in a 360-degree analysis of fintech innovation, and added that the Federal Reserve will continue to engage actively with the industry, stakeholders, and regulatory colleagues as the technology evolves and the industry works through the challenges currently seen in the development of distributed ledger technologies.

Brainard concluded saying, “We should be attentive to the potential benefits of these new technologies, and prepared to make the necessary regulatory adjustments if their safety and integrity is proven and their potential benefits found to be in the public interest.”

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