Standard Chartered has come up with a report that explored the potential of blockchain technology and addressed whether the distributed ledger has the potential to disrupt Target2Securities (T2S) project by the European Central Bank  which is the longstanding and ambitious initiative launched in 2006. 

T2S aims to standardise European cross-border trade settlement by integrating securities and cash accounts onto a single IT platform. The T2S platform and Central Securities Depositories (CSDs) across Europe will, therefore, be interconnected through a single utility known as the integrated model intended to enable cross-border real-time DVP settlement inside Europe.

According to the report, the bank agrees that the distributed ledger technology’s benefits like reducing counterparty risk, real-time settlement capability will disrupt T2S but says that all this is "hypothetical" at the moment.

“Blockchain has the potential to impact markets globally including emerging economies, which are in the early stages of developing their market infrastructures. However, we must be mindful that change will not happen overnight,” said Alan Naughton, head of product securities services at Standard Chartered Bank.

Blockchain might potentially replace T2S if the technology developed exponentially quickly, said the paper. Blockchain is in an incubator phase at present and the technology could offer opportunities and cost savings around settlement and reconciliation.

“Blockchain technology could potentially be used by T2S to improve efficiency and cost for its core delivery versus payment functionality. It could also assist across T2S users such as CSDs and custodian banks with their processing of transactions at T2S. I suspect if T2S was being created now, it would use blockchain technology in some shape or form. But it would take a long time to integrate into T2S though,” said Alex Powell, independent consultant and advisor and a blockchain infrastructure provider.

The paper also talks about operational challenges facing the  blockchain like scalability, lack of standardization, technology challenges, cyber-security issues, costs and operational risks involved in incorporating blockchain onto legacy systems among others. It also mentioned regulatory challenges facing blockchain.

The report concludes that blockchain has the potential to disrupt a number of processes including T2S and have a major impact on financial institutions globally. It also said that this is likely to take several years since many operational and regulatory challenges will need to be overcome before this materializes.

Standard Chartered has begun to assess how blockchain can fit into their businesses and ecosystem by working with clients worldwide. The bank has is observing and reviewing the possible opportunities and challenges that blockchain might bring, and how it can be included into its future business model.