Central banks around the world are exploring how distributed ledger technology (DLT) could potentially improve the efficiency of interbank transactions or even power digital versions of sovereign currencies.
Now, the Bank of England has taken a step forward in this direction with its “Project Meridian”, which has successfully tested the use of DLT in running large and complex interbank transactions.
The project was run through the Bank for International Settlements (BIS) London innovation hub, and aimed 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.
DLT Systems to Power CBDCs?
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 to 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.
DLT systems that help keep records of and verify crypto transactions have inspired innovation in traditional finance. 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).
Although the project has demonstrated that synchronized settlements are possible with commercial bank reserves kept with the central bank, implementation of such systems requires “policy, regulatory and legal” considerations, the report said.
Meridian is one of several projects by the BIS Innovation Hub dedicated to examining new developments in fintech, from decentralized finance to CBDC systems. While the project is a step forward, there is still much work to be done in terms of policy and regulatory considerations before DLT can be fully implemented in the interbank system.
