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Deutsche Bundesbank has made progress developing a blockchain-based settlement infrastructure, but the system is not yet market ready.
Carl-Ludwig Thiele, a member of the Deutsche Bundesbank executive board, offered an update on the bank’s progress speaking at the G20 conference in Wiesbaden. His comments, “Digitizing finance, financial inclusion and financial literacy,” are available on the bank’s website.
Thiele noted the bank develops and operates large financial market infrastructures in line with technological advances. The bank needs to be aware of the potential benefits and risks of this technology early on.
Working with Deutsche Börse, the bank has developed a preliminary prototype for a blockchain-based settlement that has the following capabilities:
- Settling payments based on blockchain technology,
- Transferring securities,
- Processing delivery-versus-payment transactions, in which securities purchases settled and pay simultaneously,
- Processing basic corporate actions, including coupon payments on bonds and redeeming maturing securities.
The project’s goal is to learn the following:
• How the technology works,
• How reliable and secure blockchain-based transactions are,
• What factors impact the costs of blockchain-based transactions,
• How effective and efficient blockchain-based processes are,
• How current processes can be improved with blockchain technology.
Key Goal: Process Efficiency
Improving process efficiency is an overriding goal. A shared data pool across all entities concerned should enable standardizing and simplifying some of the more complex transaction monitoring processes.
A shared data pool combined with flexible access rights would, for example, provide the conditions whereby relevant regulatory reporting and internal audit requirements are addressed with less effort and are more securely designed.
Deutsche Bundesbank chose a concept based on a Hyperledger blockchain. The top considerations were:
• A closed – or “permissioned blockchain” – network, in which only authorized users can transact on the network.
• Responsibility and confidentiality. Future financial transactions will be governed by current standards in these two key areas. Hence, every transaction is encrypted, in addition to the transacting parties’ identities.
Further Development Needed
The study indicates blockchain technology can be adapted meet current financial system needs and requirements. And while the prototype works, further development for mass use presents challenges.
The test application allows for simulating large-volume delivery-versus-payment securities transactions.
The joint project has developed an elementary, though functional, blockchain-based application catering to the financial sector’s basic requirements.
The bank is presently unable to know if the application can allow for mass use or whether this it is a viable option in terms of costs.
“With this as our starting point, we aim to develop a technically more sophisticated prototype, capable of providing information on technical performance and thus allowing comparison with our present settlement infrastructure,” Thiele said.
Image from Wikimedia.