Distributed ledger technology (DLT)-based securities settlement without regulation could lead to monopolies, according to a new paper from the Bank of England.

Authored by Evangelos Benos, Rodney Garratt, and Pedro Gurrola-Perez, the paper “The economics of distributed ledger technology for securities settlement” examines the extent to which DLT could add value and change securities settlement. The authors state:

“DLT has the potential to improve efficiency and reduce costs in securities settlement, but the technology is still evolving and it is uncertain at this point what form, if any, a DLT-based solution for securities settlement will ultimately take

“[I]f DLT-based securities settlement becomes a reality, then it is likely to be concentrated among few providers which, in the absence of regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus.”

The authors explain that implementation of DLT in the securities landscape could replace a small number of CSDs by a small number of distributed ledger network providers, adding that “as a result future settlement services may be associated with some form of monopoly pricing.”

Describing a fully decentralized DL-based settlement industry, the authors present a scenario where there would be no settlement service providers but instead providers of technological solutions that facilitate bilateral settlement. They explain that such a system

“would economize on intermediation costs and the associated fees charged by traditional settlement service providers... The elimination of these costs would create an economic surplus which, in a competitive environment, benefits end-users by reducing their settlement costs. However, whether a decentralized industry for DL-based settlement services ends up being a competitive one, largely depends on its characteristics.”

The authors also highlight implementation risks if firm, in order to gain first mover advantage, deploy solutions which have not been sufficiently tested, including against cyber risk, or which suffer from other design flaws.