The Federal Reserve has released a new paper that explores the application of blockchain or distributed ledger technology (DLT) in the area of payments, clearing, and settlement.

In order to understand the implications of DLT developments in the said areas, a team of Federal Reserve staff (FR research team) conducted interviews and conversations with approximately 30 key industry stakeholders, including market infrastructures, financial institutions, other government agencies, technology start-ups, more-established technology firms, and industry consortia.

“Many proponents in the fintech community have suggested that the widespread deployment of DLT may bring fundamental changes to not only the technology architecture of financial markets but also the financial market structure”, the paper said.

The authors say that DLT represents an opportunity to deal with existing frictions in payments, clearing, and settlement and may cause market structure changes. However, they emphasized that the extent of these changes will depend on how the financial industry addresses certain challenges to implementation and adopts the technology,

“The extent to which DLT will have an impact on the financial architecture may become clearer as the technology matures. The level of impact will depend at least in part on decisions about which components of DLT are adopted and how DLT arrangements are ultimately implemented”, the authors wrote.

According to the paper, potential blockchain 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, it said.

However, it noted that the technology is currently at an early stage and pointed out a number of challenges to development and adoption, including technological hurdles, legal considerations, and risk management considerations and others.

The paper concluded saying:

“DLT has the potential to also drive change to the financial market structure in ways that take advantage of the new technology. Although it is too soon to predict what these changes may be, the way that the industry finds use cases and addresses the challenges identified in this paper will provide clarity over time. As the technologies and experimentation with these technologies continue to develop, it will be important to thoroughly understand how these changes apply broadly.”