One of the sectors that have been investigated for possible implementation of the Distributed Ledger Technology (DLT)is financial market infrastructures (FMIs). FMIs represent intermediaries between various financial institutions that record and track transactions taking place on centralized ledgers. Recently, many researchers are experimenting the implementation of DLT in wholesale payment systems.
In Canada, the Large Value Transfer System (LVTS) is currently the country’s wholesale payment system which processes around $175 billion each and every business day. Wholesale payment systems represent ideal implementation of the DLT, due to their simplicity. In 2016, the Bank of Canada, along with Payments Canada, R3 and a group of Canadian retail banks started a project, which they named “Jasper”, to formulate a wholesale payment system that is based on the DLT.
The direct goal of “Jasper” is to design a proof-of-concept protocol that leverages a settlement asset that is issued and managed by a central bank (without any intentions to advance to a production level protocol). Throughout the project’s first phase (Phase 1), users created a settlement capability via an Ethereum platform and demonstrated its capability of exchanging a settlement asset between various participants. In the second phase (Phase 2), which is built on a Corda platform, deployed a liquidity saving mechanism (LSM) that enables users to coordinate their transactions in order to reduce the liquidity needs. Phase 2 will include a white paper prepared by users that will be published by the end of June 2017, outlining the technical and policy-related implications of the project.
One of the most essential lessons concluded from Jasper’s experiments is that the currently available versions of distributed ledgers may not be able to offer the overall benefits provided with present centralized solutions for interbank payments. Core wholesale payment solutions operate in an efficient manner. However, they may offer a myriad of benefits for the greater proportion of payment system users and the overall financial system from a payment system based on the DLT, when considering savings from reduced back office reconciliation and better communication with a larger DLT framework of financial markets.
Image from Flickr