Why Central Banks Should Use Distributed Ledger Technology

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The Bank of England is researching how it could use distributed ledger technology. Photo: Cris Tapper/Shutterstock

How should central banks deal with the increasing use of distributed ledger technology? They could adopt it.

That’s one outcome outlined by a new report published by the Bank of International Settlement (BIS) focusing on the impact of distributed financial technology, a follow up to the BIS’s last report, which looked into issues with the correspondent banking system.

Distributed ledgers are especially relevant to central banks because of how they’re changing the payments landscape. Beyond the widely publicized early iteration as an asset such as with Bitcoin, “distributed ledgers could be used by traditional payment service providers (such as banks) with the aim of improving the efficiency of certain processes.” These technologies also open the industry to potential new entrants.

All of which has significant implications for central banking. “The emergence of distributed ledger technology could present a hypothetical challenge to central banks,” the report suggests.

But another take is for central banks to embrace the technology’s potential as to improve their own functions, which some are already looking into. “One option is to consider using the technology itself,” the report suggests, noting that within the central bank community, “the Bank of Canada and the Bank of England have begun research into a number of these topics.”

It’s not the first time the idea has been suggested. Deutsche Bank published a report in October outlining exactly how central banks might adopt distributed ledger technology, which too echoed the sentiments of a thought piece penned by St. Louis Fed economist David Andalfatto earlier this year.

Read the BIS’s full report here.