DLT in our finances: applications and challenges

DLT (distributed ledger technology) has great potential in finance, with promising applications in a wide range of fields such as international funds transfers, international trade and securities trading and post-trading. A common feature in all these areas is the need to coordinate a multitude of actors among whom there is not necessarily a relationship of trust. Here DLT has the potential to improve transaction efficiency and traceability and thus reduce costs and certain risks.

A distributed ledger is essentially a unique database distributed (through identical multiple copies) among various participants and updated in a synchronised manner. These updates take place by consensus among the parties according to procedures which ensure the accuracy and legitimacy of entries. Generally DLTs are implemented by means of a blockchain, which is a type of database in which individual transactions are processed and stored in groups (or blocks) interconnected in chronological order, giving rise to a chain. The first cryptocurrency (bitcoin), for example, is based on blockchain technology.

For the man in the street, one of the most promising applications of DLT consists of so-called intelligent contracts. These contracts are based on an IT code which allows an agreement to be verified and automatically executed without the need for intermediaries. For example, an intelligent contract allows the payment of a regular bond coupon to be automatically executed and transferred to its holder in accordance with the contractual conditions.

However, DLT also has limitations, derived mainly from its still-incipient development. Notable among other things is the lack of a uniform regulatory and supervisory position vis-à-vis the new financial scenario which this technology could potentially bring: disintermediation of banking functions, entry of new actors, exit of others, etc. These pose an unquestionable challenge for the Banco de España and other central authorities in bank customer protection, payment system security or anti-money laundering and counter terrorist financing.

The Banco de España and DLT

The Banco de España actively addresses the challenges posed by DLT through its ongoing monitoring of market developments and its participation in the “expert network” of Eurosystem central banks, focused specifically on the application of this technology in the area of payments and market infrastructure.

Source: Romero Ugarte, J.L. (2018) Distributed Ledger Technology (DLT)Abre en ventana nueva: introduction, Economic Bulletin 4/2018. Analytical Articles. Banco de España

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