Federal Reserve Is More Interested In Private Blockchains

Dec 09, 2016 at 10:25 // Blockchain
Jacob Okonya

The United States Federal reserve has shown a very strong interest in components of  blockchain and distributed ledger technology. This was witnessed by the release of a paper whose aim was to investigate the potentials of blockchain and outline the Federal Reserve’s interest in the blockchain.

What was the main focus of this research paper?

The main focus of this research was on blockchain technology and its incubation of different applications in the fintech world. The report tagged “Distributed ledger technology in payments, clearing, and settlement” explores the central bank’s interest in blockchain and the potentials of blockchain technology.

We obtained some lines from inside the report:

“The driving force behind efforts to develop and deploy DLT in payments, clearing, and settlement is an expectation that the technology could reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets. The purported benefits of DLT that could address these frictions, including improved end-to-end settlement speed, data auditability, resilience, and cost efficiency, have led industry participants to investigate the application of DLT to a wide variety of PCS processes. Proponents of the technology have claimed that DLT could help foster a more efficient and safe payments system, and may even have the potential to fundamentally change the way in which PCS activities are conducted and the roles that financial institutions and infrastructures currently play.”

Why the report criticizes Bitcoin and open ledger system?

However, the report by the Federal reserve was authored by 14 experts, who were more indulged in private ledgers than the open ledger system which Bitcoin’s architecture embodies. The authors argue that some central trusted authority should remain to control the system and help in planning. Moreover, they emphasize distributed ledger technology arrangements should still incorporate trusted third parties, stating that:

“Many models may alter or eliminate some roles of current intermediaries in payments, clearing, and settlement but may not necessarily eliminate the need for coordination or centralization of certain functions by trusted intermediaries. These trusted intermediaries could still be needed to play important roles in addressing frictions beyond what DLT may be able to accomplish or may be able to use DLT arrangements to improve or evolve how they accomplish their respective missions.”

Why is the central bank interested in “permissioned” ledgers?

The paper maintains that some aspects of financial planning, control and leverages should not be audited (to allow quantitative easing and fractional reserve banking) by the public to control speculations. The Federal Reserve acknowledges that blockchain reduces complexities, especially with cross-border transactions. It summarized:

“Potential use cases in payments, clearing and settlement, include cross-border payments and the post-trade clearing and settlement of securities. These use cases could address operational and financial frictions around existing services.”

The central bank gives credit to blockchain efficiency because of its immutability and network resiliency.

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