Exploring fintech

MIP OnLine - 2017

The ECB and the Bank of Japan publish first report on distributed ledger technology

September 2017

Modern technologies are significantly changing our lives and businesses. The financial industry has witnessed exciting developments too, with fintech (financial technology) becoming a hot topic in the media. Distributed ledger technology (DLT), in particular, has sparked the interest of major actors in the industry – including financial institutions and central banks – because of its potential to disrupt traditional financial services.

The ECB has also been monitoring and exploring the impact of these new technologies on financial market infrastructure, for example through experimental work with DLT. In December 2016 the Bank of Japan and the ECB launched a joint research project to study possible uses of DLT for financial market infrastructure. Project Stella capitalises on the experiences of both institutions as providers of market infrastructure services and contributes to the ongoing broader debate about the potential benefits of DLT in the sector.

In this article, we share with all MIP OnLine readers the main findings of the experimental work conducted in recent months and invite fintech enthusiasts to delve deeper into the first Stella report entitled “Payment systems: liquidity saving mechanisms in a distributed ledger environment”.

Setting the scene: distributed ledger technology

A distributed ledger is a tool for recording data – such as financial transactions – that is shared across the network of many computers, rather than stored in a central location. The members of the network may have different permission rights for accessing and modifying data on the ledger.

By eliminating intermediaries and connecting end users directly, this technology has the potential to lower back-office costs, increase the efficiency of processes and record-keeping, and ultimately lead to improvements in cybersecurity and resilience.

Testing payment systems in a DLT environment

The Bank of Japan and the ECB have focused their first joint study on the implications, in terms of efficiency and safety, of running some functionalities of their respective payment system services in a DLT environment. The teams replicated the liquidity-saving mechanisms of their real-time gross settlement (RTGS) payment systems – BOJ-NET and TARGET2 – in a DLT environment (using Hyperledger Fabric 0.6.1), allowing them to test the performance of specific system functionalities. Overall, the series of tests yielded positive results in terms of efficiency:

• DLT-based solutions could meet the current performance needs of an RTGS system; during the tests, all payments were processed without difficulty in both average and peak traffic scenarios.
• The expected trade-off between network size and performance was observed; the bigger the size of the network (i.e. number of validating nodes) and the longer the distance between the nodes, the longer the payment processing time.

In terms of resilience, the study provides a fresh perspective:

• The chosen DLT set-up was able to withstand potential failure of individual network nodes; the tests confirmed that a validating node could recover in a relatively short period of time.
• The DLT environment was generally resilient to incorrect data formats; the system was able to continue to function even when a high number of transaction requests with incorrect formats were submitted.

Conclusion

In the first step of this collaboration, the results have provided a promising view of the potential use of DLT solutions for payment systems in the future. However, it is important to highlight that the work has been conducted in a specific test set-up and no conclusion can be drawn on the use of a DLT solution in a production environment. The report also notes that, at its current stage of development, the technology requires further assessment before any solutions for large-scale applications could be considered.

Click on the links below to learn more about the tests and results from the first phase of project Stella!

Project Stella first report – leaflet
Payment systems: liquidity saving mechanisms in a distributed ledger environment – Stella project report