The U.S. Federal Reserve has published a paper on distributed ledger technology titled, Distributed Ledger Technology in Payments, Clearing, and Settlement.

The paper analyzes the growing popularity of digital finance, also referred to as fintech, with an emphasis on distributed ledger technology (DLT), an offshoot of innovations in digital finance with the potential to transform payment, clearing, and settlement (PCS) processes, including how funds are transferred and how securities, commodities, and derivatives are cleared and settled.

The authors of the paper stress that DLT has no single definition, and for the purpose of the paper, refer to it as “some combination of components including peer-to-peer networking, distributed data storage, and cryptography that, among other things, can potentially change the way in which the storage, recordkeeping, and transfer of a digital asset is done.”

According to the paper, the “driving force behind efforts to develop and deploy DLT in payments, clearing, and settlement is an expectation that the technology could reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets.”

The purported benefits of DLT that could address these frictions, including improved end-to-end settlement speed, data auditability, resilience, and cost efficiency, have led industry participants to investigate the application of DLT to a wide variety of PCS processes, the paper states.

The Federal Reserve states that its interest in DLT stems from the fact that it has a public policy interest in understanding and monitoring the development of innovations that could affect the structural design and functioning of financial markets.

As a regulator and supervisor of financial institutions involved in PCS activities, an operator of retail and large-value payment and settlement systems, and a catalyst for payments system improvement, the Federal Reserve said it is also in a unique position to view the different implications of payments innovations from a wide range of perspectives.

In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion cites the paper. Safe and efficient arrangements for conducting PCS processes are critical to the proper functioning of the financial markets, and to financial stability more broadly, the benefits and risks that may arise with any potentially transformative changes to PCS processes should be thoroughly understood and managed by the relevant stakeholders the paper states.

To help them understand the implications of DLT developments in payments, clearing and settlement, a team of Federal Reserve staff (FR research team) held discussions with a broad range of parties that are interested in, participate in, or are otherwise contributing to the evolution of DLT, the paper states. The team conducted interviews and conversations with approximately 30 key industry stakeholders, including market infrastructures, financial institutions, other government agencies, technology start-ups, more-established technology firms, and industry consortia.