Blockchain with Atomic Settlement Safer and More Efficient for FX
Blockchain (DLT) shows it can make wholesale FX transactions faster and cheaper
This is my daily post. I write daily but send my newsletter to your email only on Sundays. Go HERE to see my past newsletters.
HAND CURATED FOR YOU
The BIS’s Project Meridian demonstrates how atomic settlement of wholesale foreign exchange (FX) transactions using distributed ledger technology (DLT) is a winning proposition for all users.
The project had a dream team of users with the BIS Innovation Hub, Bank of England, Bank of France, Bank of Italy, Deutsche Bundesbank, and the European Central Bank all joining in to see what DLT can do.
Atomic settlement is the transfer of money or assets between parties that either succeeds or fails, eliminating the risk of partial or incomplete multiparty transactions.
In short, by putting settlements on blockchain, payments happen, or not, immediately, and no one is stuck waiting for the FX transaction to settle.
Compare this with the commonly used batch settlements, where a group of FX payments is aggregated and paid out at intervals throughout the day.
Another benefit is that faster settlement could lower liquidity costs for counterparties by removing the need to set aside funds for an extended period to settle transactions. Imagine waiting for a batch of transactions to settle and putting money in escrow.
For those who prefer batch transactions, as netting transactions may be more efficient for their specific use, or because they wish to conform with existing practice, DLT can allow users to specify the batch size to ensure reduced liquidity.
Atomic settlement is huge. The use case of DLT in wholesale FX markets demonstrates how it can enhance the efficiency and safety of the system.
Ultimately, this boils down to DLT (blockchain) saving money for everyone on cross-border transactions.
👉What DLT synchronized FX can do:
🔹 Be agnostic to both the asset or fund of the transaction involved and the technology of the ledgers on which settlement is performed, highlighting its potential use in a range of markets.
🔹 Conduct payment-versus-payment (PvP) FX settlements without taking on credit or liquidity risk, and without the SO needing an account in the respective RTGS systems. This limits the credit and liquidity risks SOs pose to the financial system.
🔹 In synchronisation, settlement is automated and atomic, reducing the need for arrangements like escrow. Escrow is replaced by earmarking the assets and funds for a short period of time before settlement, without moving them from their existing account.
🔹 Exchange via two wholesale payment infrastructures if either of them can earmark assets or funds. This means that the model could potentially be applied to several different currencies and markets with different payment infrastructure.
🔹 Potentially enable additional functionalities to be provided to market participants to meet their needs through wholesale payment infrastructures: for example, allowing commercial banks to set approval limits on transactions flowing through their accounts.
🔹 Provide end users with greater choice and a way to balance the desires for immediacy and liquidity efficiency.
If you know someone who would like this newsletter, please share it with them and help grow our Asia, CBDC, and AI aficionados community!
