The European Central Bank is in favour of a consolidated approach when it comes to distributed ledger technology (DLT) as indicated in its new report ‘The use of DLT in post-trade processes, Advisory Groups on Market, Infrastructures for Securities and Collateral and for Payments’.
In the current fast-changing environment, the adoption of solutions based on DLT could bring both opportunities and challenges for the financial ecosystem and its stakeholders.
The report seeks to establish a common understanding among European stakeholders of the progress that the industry has made to date in implementing DLT in line with the current regulatory system.
The ECB highlights that clear and sound governance of services and functions should be ensured in a DLT environment.
“In this regard, a consolidated approach based on regulatory licences and conduct of business rules will create appropriate incentives to manage conflicts of interest,” the report reads.
A consolidated approach will also ensure a sound basis for issuance, custody and settlement through the presence of licensed and trusted parties, says the ECB.
This consolidated approach should additionally allow for platform governance and application governance. It should take into consideration the governance of intellectual property rights.
Elsewhere, the report highlights that in the current landscape, a clear business case has not yet emerged for the use of DLT in post-trade processes and cites that the solutions that exist at present are mainly real-life experiments and internal prototypes.
There are also many other ongoing DLT-based initiatives to improve the financial landscape that could coexist with current processors and even enhance them, the report outlines.
“This situation might evolve rapidly in the future considering the changes in the regulatory framework and rapid technological innovation,” the ECB comments.
“In this context, it is essential to ensure the safe and efficient coexistence of different types of architecture and networks to support innovation while maintaining an integrated market for post-trade services and infrastructures.”
According to the ECB, most current initiatives focus on the proprietary business rules and technical requirements, such as standards, of individual groups of market stakeholders.
This could lead to a lack of interoperability between the different solutions and hinder the opportunities and benefits that developments and improvements are expected to provide.
The report stresses that interoperability is necessary for the implementation of new financial market technologies that are characterised by interdependencies and network effects.
“To improve the use of such new technologies (both DLT and others) and to avoid further fragmentation, common protocols and standards are needed. Legacy and DLT-based
systems need connection and communication standards that are robust in the face of
technological innovation,” the ECB affirms.
It suggests that this will help to avoid a situation where each system becomes a different ecosystem isolated from the others. It will also help to ensure a level playing field among market participants, irrespective of the underlying technology.
Interoperability should therefore be seen as a crucial feature when developing any post-trade solution based on DLT, according to the ECB.
The ECB adds: “It should also be a key consideration when addressing preliminary issues, such as the business design – and in some instances even the technical design – of a solution and how to link the entire chain of stakeholders and mechanisms, including end-users and existing engines/tools that need to remain accessible.”
.jpg)