BIS Report: DLT 'Promising' But 'A Long Way Off'

The Bank for International Settlements (BIS) has released a new report on blockchains and distributed ledger technology.

Described as an an analytical guide to the tech for central banks and financial market authorities, the report was penned by the BIS Committee on Payments and Market Infrastructures. (The BIS has been described as the "central banker's central bank", as it provides banking resources to the world's central bank ecosystem.)

The report

, released today, offers a broad overview of blockchain's possible use in market infrastructures, focusing on its technical design, impact on market safety and efficiency and the broader potential influence the tech could have should it see wider adoption.

Overall, the scope is wide, and the working group behind the paper stops short of issuing any formal design recommendations. Rather, it echoes publications from market watchdogs like the European Markets and Securities Authority (ESMA), which has said that the tech's long-term impact is uncertain at this stage.

The report's authors state:

"Developments to date suggest that DLT bears promise but that there is still a long way to go before that promise may be fully realized. Much work is needed to ensure that the legal underpinnings of DLT arrangements are sound, governance structures are robust, technology solutions meet industry needs and that appropriate data controls are in place and satisfy regulatory requirements."

Perhaps the most notable section of the report challenges the concept that blockchains are naturally more efficient than other alternatives.

"It is important to consider that potential improvements in the speed of end-to-end processing are being referred to at the ecosystem level (i.e. across the value chain), and that the speed of transaction settlement within the infrastructure itself may be slower," it reads.

The report is the latest from the BIS, which has previously explored blockchain-related concepts in its published work. The Committee on Payments and Market Infrastructures previously addressed bitcoin and digital currencies in a report released in 2015.

At the time, the BIS suggested that the widespread use of digital currencies could have an impact on the working abilities of central banks, while speculating that more traditional financial firms might benefit from exploring its applications.

Unanswered questions

Though the report seeks to cast a wide net in its exploration of the tech, its most notable aspects relate to the as-yet unanswered questions around blockchain's use for market infrastructure.

Those behind the report appear to be in two minds on if current distributed ledger designs may ultimately help any transparency boosts the tech could bring.

The BIS talks about the trade-offs inherent in limiting the number of participants in a ledger, while also suggesting that a more open and resilient financial system may provide benefits.

"One possible benefit of DLT in an interconnected system is that data shared across key entities may lead to greater market transparency and more effective risk management across systems," the report reads.

Also singled out are so-called smart contracts (or self-executing code that can interact and create changes within a blockchain system), with the BIs warning that these applications may create "challenges and risks" for the market.

"Automated contract tools, for example, are not immune to malicious or faulty code," it reads. "Moreover, simultaneous automated execution between contracts (and codes) could cause adverse and unpredictable behavioural patterns in the financial ecosystem. Likewise, interdependencies between contracts (and codes) could result in a transmission channel for unforeseen risk."

Ultimately, the BIS report stresses that what is needed most is a "well-founded, clear, transparent and enforceable legal basis" for the technology.

It concludes:

"DLT can increase legal risks if there is ambiguity or lack of certainty about an arrangement’s legal basis."

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