ECB: Blockchain technology ‘not mature enough’

The European Central Bank and the Bank of Japan have concluded that distributed ledger technology (DLT) is ‘not mature enough’ for their RTGS payment systems.

The pair outlined their views as part of a joint research project into the possible use of distributed ledger technology for financial market infrastructures.

DLT, is a set of tools for recording data, such as asset holdings or financial transactions, allowing a network of computers to verify and store updates without a single central management system.

Depending on technological developments and implementation models, this technology could increase efficiency, for example by facilitating the automation of record-keeping and streamlining complex processes, and possibly lead to improvements in safety and resilience to a range of non-financial risks.

In the first step of their cooperation, the BOJ and the ECB conducted in-depth experiments on whether specific existing functionalities of their respective payment systems could be run in a DLT environment in an efficient and safe manner.

Specifically, the Real-Time Gross Settlement (RTGS) systems of the two central banks were replicated in a publicly available DLT application, Hyperledger Fabric and a number of tests were run.

The findings of the joint analysis were:

• Experiments using liquidity saving mechanisms found that DLT-based solutions could meet the current performance needs of an RTGS system. Within the restricted test environment, both average and peak payment traffic consistent with that of BOJ-NET and TARGET2 (the two RTGS systems) was processed without difficulty.

• The study also confirmed the expected pattern of a DLT environment. The bigger the network (i.e. the higher the number of nodes) and the longer the distance between the network nodes, the longer it takes for a payment to be processed and the more likely it is for messages sent by one or more nodes to be ignored in the transaction processing. Network configuration is relevant in this respect.

• The tested DLT solutions were also found to be resilient to the failure of individual network nodes and able to withstand a high number of incorrectly formatted messages. Although the test scenarios were not exhaustive, it is worth noting that the test series performed had a limited impact on the availability of the overall system. However, the design of the platform used in the tests includes a certificate authority, which could become a single point of failure that could undermine the benefit of distributed validation.

The report concluded: “Given the relative immaturity of the technology, DLT is not a solution for large-scale applications like BOJ-NET and TARGET2 at this stage of development.”

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