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Distributed ledger technologies in securities post-trading - Revolution or evolution?

Author

Listed:
  • Ruttenberg, Wiebe
  • Pinna, Andrea

Abstract

Over the last decade, information technology has contributed significantly to the evolution of financial markets, without, however, revolutionising the way in which financial institutions interact with one another. This may be about to change, as some market players are now predicting that new database technologies, such as blockchain and other distributed ledger technologies (DLTs), could be the source of an imminent revolution. This paper analyses the main features of DLTs that could influence their potential adoption by financial institutions and discusses how the use of these technologies could affect the European post-trade market for securities. The original protocol underlying DLTs has its roots in the anarchic world of virtual currencies, which operate outside the conventional financial system. The public debate on DLTs has also been very much focused on the revolutionary potential of the technology. This paper concludes that, irrespective of the technology used and the market players involved, certain processes that feature in the post-trade market for securities will still need to be performed by institutions. DLTs could, however, stimulate a reorganisation of financial markets, which could in turn: (i) reduce reconciliation costs, (ii) streamline the post-trade value chain, and (iii) allow more efficient use to be made of collateral and regulatory capital. It should, nevertheless, be remembered that research into DLTs and their uses is at an early stage. The scope for financial institutions to adopt DLTs and their potential impact on mainstream financial markets are still unclear. This paper discusses three potential models of how market players could adopt DLTs for performing core post-trade functions. The DLT could be adopted either: (i) in clusters, (ii) collectively, or (iii) peer to peer. The evaluation of the three adoption models assumes that they are all equally compatible with the regulatory framework. It shows that, assuming this to be the case, they would each have different advantages and costs. JEL Classification: G21, G23, L15, O33

Suggested Citation

  • Ruttenberg, Wiebe & Pinna, Andrea, 2016. "Distributed ledger technologies in securities post-trading - Revolution or evolution?," Occasional Paper Series 172, European Central Bank.
    • Handle: RePEc:ecb:ecbops:2016172
    Note: 1924296
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecbop172.en.pdf
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    Citations

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    Cited by:

    1. Jonathan Chiu & Thorsten V Koeppl, 2019. "Blockchain-Based Settlement for Asset Trading," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1716-1753.
    2. Bullmann, Dirk & Klemm, Jonas & Pinna, Andrea, 2019. "In search for stability in crypto-assets: are stablecoins the solution?," Occasional Paper Series 230, European Central Bank.
    3. Huibers Fred, 2024. "Distributed Ledger Technology and the Future of Money and Banking: Banking is Necessary, Banks Are Not. Bill Gates 1994," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 14(2), pages 213-249, May.
    4. José Manuel González Páramo, 2017. "Financial innovation in the digital age: challenges for regulation and supervision," Financial Stability Review, Banco de España, issue Spring.
    5. Randy Priem, 2020. "Distributed ledger technology for securities clearing and settlement: benefits, risks, and regulatory implications," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-25, December.
    6. Dionysopoulos, Lambis & Marra, Miriam & Urquhart, Andrew, 2024. "Central bank digital currencies: A critical review," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Schuster, Philipp & Theissen, Erik & Uhrig-Homburg, Marliese, 2020. "Finanzwirtschaftliche Anwendungen der Blockchain-Technologie," CFR Working Papers 20-02, University of Cologne, Centre for Financial Research (CFR).
    8. Chowdhury, Emon Kalyan, 2023. "Impact of Blockchain on Stock Market," MPRA Paper 118189, University Library of Munich, Germany, revised 15 Feb 2023.
    9. Lim, King Yoong & Liu, Chunping & Zhang, Shuonan, 2024. "Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting," Emerging Markets Review, Elsevier, vol. 59(C).
    10. Michel Rauchs & Andrew Glidden & Brian Gordon & Gina Pieters & Martino Recanatini & Francois Rostand & Kathryn Vagneur & Bryan Zhang, 2018. "Distributed Ledger Technology Systems. A Conceptual Framework," Cambridge Centre for Alternative Finance Reports 201810-dlts, Cambridge Centre for Alternative Finance, Cambridge Judge Business School, University of Cambridge.
    11. Benos, Evangelos & Garratt, Rodney & Gurrola-Perez, Pedro, 2017. "The economics of distributed ledger technology for securities settlement," Bank of England working papers 670, Bank of England.
    12. Fangyuan Zhao & Wai Kin (Victor) Chan, 2020. "When Is Blockchain Worth It? A Case Study of Carbon Trading," Energies, MDPI, vol. 13(8), pages 1-28, April.
    13. Carlo Gola & Andrea Caponera, 2019. "Policy issues on crypto-assets," LIUC Papers in Economics 2019-7, Cattaneo University (LIUC).
    14. José Manuel González Páramo, 2017. "Financial innovation in the digital age: challenges for regulation and supervision," Revista de Estabilidad Financiera, Banco de España, issue Primavera.
    15. Manaa, Mehdi & Chimienti, Maria Teresa & Adachi, Mitsutoshi & Athanassiou, Phoebus & Balteanu, Irina & Calza, Alessandro & Devaney, Conall & Diaz Fernandez, Ester & Eser, Fabian & Ganoulis, Ioannis & , 2019. "Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures," Occasional Paper Series 223, European Central Bank.
    16. Julio Pombo-Romero & Oliver Rúas-Barrosa, 2022. "A Blockchain-Based Financial Instrument for the Decarbonization of Irrigated Agriculture," Sustainability, MDPI, vol. 14(14), pages 1-22, July.
    17. Jakob Hackel & Wolfgang Haunold & Hannes Hermanky & Alfred Taudes, 2021. "Distributed ledger technologies for securities settlement – the case for running T2S on DLT," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/21, pages 13-33.
    18. Philipp Schuster & Erik Theissen & Marliese Uhrig-Homburg, 2020. "Finanzwirtschaftliche Anwendungen der Blockchain-Technologie [Applications of Blockchain Technology in Finance]," Schmalenbach Journal of Business Research, Springer, vol. 72(2), pages 125-147, June.

    More about this item

    Keywords

    Bitcoin; blockchain; clearing; distributed ledger technologies; financial market infrastructures; fintech; settlement;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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