A new report from Greenwich Associates warns that, if taken too far, distributed ledger technology (DLT) could reintroduce problems financial markets have been working to alleviate for more than 500 years.
DLT has been touted as a means of creating new efficiencies in a number of different areas within the financial system, one of which being clearing and settlement. Proponents of this technology argue that it should replace the existing clearing system, contending that cryptographically enforced contracts can make secure settlement instantaneous and default impossible, thus avoiding the need for posting collateral and the existing system altogether.
Yet the Greenwich report, Steampunk Settlement: Deploying Futuristic Technology to Achieve an Anachronistic Result, claims that the existing clearing and settlement systems are actually extraordinarily efficient, and that replacing them with DLT risks changing this.
The report argues that while the existing efficiencies would not be wiped out entirely with a real-time gross settlement associated with DLT, it would save billions of dollars in reserve funds at the cost of requiring hundreds of billions in prefunding, creating a burden on money markets that participants have spent over a century developing systems to alleviate.
“DLT has great potential to enhance the existing system,” says Ken Monahan, senior analyst for Greenwich and the author of the report. “But in reality, the technology is evolutionary, not revolutionary, and attempting to replace the clearing infrastructure with this technology is to carry the system not into the future, but into the past.”
He adds: “This is precisely the lesson the Venetian Senate learned in 1584 in a strikingly similar way. By substituting a payment system for a credit system, they sucked liquidity out of the economy. Unlike the Venetians, who really did blaze a new path, we have the benefit of learning from history, and this is its lesson: DLT has a big role to play in improving the quality of the settlement infrastructure, but it cannot replace it entirely without imposing the very costs it was designed to reduce.”