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BoE calls for more thought on the post-trade impact of DLT

Bank of EnglandThe Bank of England’s deputy governor Sir Jon Cunliffe has raised concerns over the disruption that may be caused by the introduction of a post-trade market built on distributed ledger technology (DLT).

These concerns centre on the challenges in liquidity and the role of supervisory authorities in world of instantaneous settlement and decentralised infrastructure.

In a speech to the Association for Financial Markets in Europe’s annual conference on 28 September, Cunliffe talked about the “potentially disruptive impact of crypto technologies on market infrastructure, on the trading, clearing, settlement and custody machinery that enables global capital markets”.

While he welcomed the opportunities that could arise from a DLT-based post-trade world, such as the consolidation of functions into a single smart contract, Cunliffe also highlighted a number of potential challenges that must be considered.

One of these relates to liquidity as a result of instantaneous settlement which will require all securities and cash to be in place at the time a trade is stuck.

“There would no longer be a window of opportunity to locate the cash and securities or to net trades against each other,” said Cunliffe. “And if each securities ledger has its own cash token, aggregate liquidity requirements could be increased further.”

He also said that the operational resilience of DLT-based systems needs to be proven over time. “The technology most widely used in existing cryptocurrencies cannot simply be copied and pasted for wide-scale use in capital markets,” said Cunliffe.

The deputy governor also questioned the absence of central bank supervision in a decentralised market structure. “It is very difficult to see how risks can be managed to the right level without a legal entity accountable for the services provided and responsible for the proper functioning of the system,” he said.

This would require greater cooperation between regulators and the market, said Cunliffe. “Close engagement between the private sector and public authorities will be crucial to ensuring we reap the benefits while managing the risks.”

© 2022 fundsTech

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