A new paper from Greenwich Associates says DLT cannot replace settlement infrastructure entirely without imposing the very costs it was designed to reduce.
Greenwich Associates has published a new whitepaper challenging the idea that blockchain-like technology could entirely replace today’s settlement infrastructure.
“DLT [distributed ledger technology] has great potential to enhance the existing system…. But in reality, the technology is evolutionary, not revolutionary, and attempting to replace the clearing infrastructure with this technology is to carry the system not into the future, but into the past,” says Greenwich Associates senior analyst Ken Monahan.
According to the paper, DLT will have a profound effect on clearing and settlement, but if taken too far, it might turn the clock backward and reintroduce problems financial markets have been working to alleviate for more than 500 years.
Some DLT enthusiasts argue that the new technology should replace, not enhance, the existing clearing system. They contend that cryptographically enforced contracts can make secure settlement instantaneous and default impossible, thus avoiding the need for posting collateral and the existing system altogether.
Yet by any measure, the existing system is extraordinarily efficient, the paper argues.
While it’s true that this efficiency would not be wiped out entirely with a RTGS system associated with DLT, the billions of dollars in reserve funds such a system could save might be at the cost of hundreds of billions in prefunding, which would create a burden on money markets that participants have spent over a century developing systems to alleviate, it says.
“From the standpoint of secure, accessible books and records, DLT represents an important step forward. From a funding perspective, it is a gigantic step backward,” the paper says.
According to the paper, DLT proponents fail to take into account the benefits of multilateral margining and netting. A RTGS system associated with DLT would be bilateral by necessity, and would require prefunding of all transactions in the market on a transaction-by-transaction basis.
“DLT has a big role to play in improving the quality of the settlement infrastructure, but it cannot replace it entirely without imposing the very costs it was designed to reduce.”
The paper is available here.
DTCC (The Depository Trust & Clearing Corporation) provided data for the research conducted by Greenwich Associates, a provider of data, analytics and insights to the ﬁnancial services industry.