BIS says distributed ledger technology could improve payment efficiency
The distributed ledger technology underlying digital currency systems has the potential to make traditional payment and market systems more efficient, the Bank for International Settlements says in a new study.The BIS's Committee on Payments and Market Infrastructure set up a working group on retail payments to study digital currencies. It found that the decentralised payment mechanism used in most digital currency systems was "the genuinely innovative element within digital currency schemes."Distributed ledgers allow remote peer-to-peer exchange of electronic value in the absence of trust between the parties and without the need for intermediaries. A transaction goes through a confirmation process that validates it and adds it to a unified ledger of which many copies are distributed across the network.These networks can work in isolation or with only marginal connection to conventional payment networks. "However, distributed ledgers could be used by traditional service providers to improve the efficiency of certain processes, such as back office clearing and settlement," the working party's report said.There may be gaps in traditional payment services that might be addressed by digital currency schemes. One potential source of advantage is that a digital currency has a global reach.Distributed ledgers have the potential to facilitate certain types of payments, such as peer-to-peer payments and cross-border transactions, at lower cost and faster."The operation of some schemes indicates the feasibility of using distributed ledgers for peer-to-per value transfers in the absence of a trusted third party," the report said.Use of distributed ledgers could have implications beyond payments, including possible adoption in financial market infrastructures and for large-value transactions.The report said implications for payment system efficiency and risks were still to be determined.