Central Banks Successfully Test DLT in Linking Financial Settlement Systems

A central bank experiment has successfully tested the use of distributed ledger technology (DLT) in running large and complex interbank transactions, according to a report released on Wednesday.

The Bank of England ran “Project Meridian” through the Bank for International Settlements’ (BIS) London innovation hub to build a prototype that could potentially speed up and reduce costs of transactions in central bank Real-Time Gross Settlement (RTGS) systems.

The project used DLT to link the central bank’s RTGS system “with other financial market infrastructures and ledgers automatically orchestrating the exchange in ownership of funds and assets in a resilient and secure way,” according to a statement issued by BIS, which groups the world’s central banks.

DLT systems that help keep records of and verify crypto transactions have inspired innovation in traditional finance, with banks around the world exploring how the technology could potentially improve the efficiency of interbank transactions or even power digital versions of sovereign currencies. However, a senior official at the Bank of England warned lawmakers in February that DLT may be too clunky to power a central bank digital currency (CBDC).

Meridian is one of several projects by the BIS Innovation Hub dedicated to examining new developments in fintech, from decentralized finance to CBDC systems.

The project tested scenarios where funds were transferred from buyer to seller only if a corresponding asset on a real estate registry moved simultaneously in the opposite direction. But the prototype can be applied other registries and other assets, including equities and bonds, according to the report.

“Applying the prototype to other asset classes, such as foreign exchange, was a principle design consideration,” the statement said.

Although the project has demonstrated that synchronized settlements are possible with commercial bank reserves kept with the central bank, implementation of such systems require “policy, regulatory and legal” considerations, the report said.

Edited by Nikhilesh De.