ECB Weighs in on Distributed Ledger Tech

Seat of the European Central Bank and Frankfurt Skyline at dawn

The seat of the European Central Bank in Frankfurt, Germany. Image: DXR

The European Central Bank (ECB) recently published a thorough exploration of the possible use case for distributed ledger technologies (DLTs) to address the recent fervor surrounding fintech in the banking world. Their conclusions are optimistic and familiar, echoing what experts around the world are saying about the future.

The bottom line according to ECB: distributed ledger tech won’t solve every problem that banks face today, but it has compelling use cases in settlement and potential in many others.

What the banking industry needs is a standard that connects disparate systems, both old and new.  Tweet This

ECB is not overly conservative in its estimation of this potential. The report asserts that DLTs could “stimulate a reorganization of financial markets, which could in turn: reduce reconciliation costs, streamline the post-trade value chain, and  allow more efficient use to be made of collateral and regulatory capital.”

Although Ripple is focused on payments rather than post-trade settlement, these conclusions closely concur with our own claims: cost reduction, streamlining the settlement process, and facilitating efficiency by allowing banks to transact directly and instantly.

However, despite the proliferation of distributed ledger solutions for many types of transactions, interoperability is still the holy grail of banking. What the industry needs is a standard that connects disparate systems, both old and new.

“The range of specifications that DLTs offer could in fact be to the detriment of standardization and interoperability, and even lead to increasing fragmentation, if market participants or clusters each adopt their own approaches. Nonetheless, irrespective of whether DLTs are adopted in clusters or across all financial institutions, the impact on post-trade processes is heavily dependent on the technological and functional implementation market that users choose.” —ECB

An interoperable solution for payments and settlement based in a shared and neutral standard lays the foundation for efficient post-trade processing, and all other types of transactions in turn. This is not a change that can happen overnight, but with the development of the Interledger Protocol, an interoperable future is possible.

Incremental change is more likely than an overnight revolution. Having been engaged with making that incremental change longer than anyone else in this space, Ripple tends to agree.

Read the full report here.