By Andrew Moyle and Stuart Davis

The Project Stella report, a European Central Bank (ECB) and Bank of Japan (BOJ) joint venture, details the applicability of distributed ledger technology for financial market infrastructure. During a one-month research project, the central banks tested whether distributed ledger technology (DLT) could sustain the liquidity saving mechanisms — a system introduced in 2013 to ensure the liquidity of banking institutions — in their current real-time gross settlement systems (RTGS).

Published in September 2017, the report concluded that DLT solutions have the potential to increase the resilience and reliability of financial transactions and are scalable to meet the needs of large value payment systems, but they have not yet reached the level of maturity needed to replace the RTGS that the ECB and BOJ currently use. The findings on the scalability of DLT are important, because regulators such as ESMA and FCA have previously questioned whether DLT could be scalable enough to meet the needs of the financial market infrastructure.


Performance: DLT solutions and Real-Time Gross Settlement system

The report found that DLT solutions could “meet the performance needs of current large value transactions in RTGS” revealing that, like RTGS, DLT can process large volumes of payment requests. The report noted this as an encouraging finding, given that DLT is more complex in nature as it is based on a validating consensus process that must occur before a transaction can be accepted and subsequently executed.

One of the issues highlighted in the report was a certificate authority (CA) failure. In order to ensure the security of the transactions, Project Stella tested the DLT application with a CA embedded in its architecture. This test revealed that when the CA was not available, transactions were rejected and consequently the sending party was alerted to a system failure. This failure may be an issue specific to the DLT application that was tested; however, given the importance of security in the financial sector, a DLT application, which heavily relies on a CA instead of self-validation by design, may consistently have a “single point of failure”.

Resilience and reliability for banking institutions

The Project Stella report found that the DLT application could withstand system failures and deal with requests that had an incorrect format. The report also found that DLT could deal with errors within the application, such as: (i) validating node failures and (ii) incorrect data formats. Notably, for validating node failures, the recovery time was relatively short (30 seconds). These findings may provide reassurance for banking institutions, given that reliability is a core tenant of their infrastructure.

Promisingly, the results show the potential of blockchain technology to support core parts of the financial market infrastructure. As financial institutions continue to develop innovative ways to embed blockchain into their workflow, industry stakeholders will be interested to see whether similar developments in the financial market infrastructure mirror those innovations.

This post was prepared with the assistance of Caroline Omotayo in the London office of Latham & Watkins.