Blockchain Faces Cost Challenges, Fed Paper Says

By Jeff Bater

Dec. 5 — Cost-benefit considerations are among the challenges facing the financial industry as it explores distributed ledger technology (DLT), also known as blockchain, a Federal Reserve paper said.

Researchers said the industry is at an early stage of development regarding the fintech innovation of DLT. As industry experiments with the innovation, a number of business, technical and financial design challenges must be addressed before DLT can become a practical solution for some aspects of payments, clearing and settlement.

“A key challenge is identifying appropriate use cases where the potential reduction in costs of operational and financial inefficiencies would justify the cost of the investment and operational changes needed to implement DLT,” the paper said.

If broad adoption of DLT is to take place in payments, clearing and settlement, the industry will need “a critical mass of participants” for any application of the technology to be successful. “Network effects are derived from the fact that each additional user of a network increases the benefit of the network for existing users,” the Fed researchers wrote. “This effect can often lead to a problem for early adoption because the net benefits for early adopters may be negative without sufficient participation, leading to a possible lack of adoption.”

DLT, in the context of payments, has the potential to provide new ways to transfer and record the ownership of digital assets and securely store information, the paper said.

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

In an Oct. 7 speech in Washington, Fed Governor Lael Brainard said that it would be premature to consider a relaxed-rules “sandbox” for blockchain because the field is in its infancy.

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