Major transformations in payments and settlements have occurred in generations. The first generation was paper-based. Delivery times for payment instruments took several days domestically and weeks internationally. The second generation involved computerization
with batch processing. Links between payment systems were made through manual or file-based interfaces.
The changeover period between technologies was long. Some paper-based instruments like checks and cash remain in use. The third generation, which has been emerging, involves electronic and mobile payment programs that enable integrated, immediate, and end-to-end
payment and settlement transfers. For example, real-time gross settlement (RTGS) systems have been available in almost all countries.
Distributed ledger technology (DLT) has been viewed as a potential platform for the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers
Many central banks have oversight and operational responsibilities in payment and settlement systems and have also taken a keen interest in DLT experiments, which provide an opportunity to test prototypes while analyzing their potential safety and efficiency
implications with the public interest in mind. Likewise, industry groups and participants have also used experimentations to explore market opportunities and address shortcomings in the current payments and settlement systems landscape.
However, the international monetary system, which has largely operated on universal financial messaging standards, could face challenges arising from DLT. For example,
more than 200 market infrastructures use SWIFT and about 11,000 institutions across 200 countries and territories are connected to SWIFT.
Interoperability issues would need to be addressed to avoid fragmentation risk.
Fragmentation could arise at two levels, including
(i) interoperability of DLT systems with legacy infrastructures, and
(ii) interoperability between distributed ledgers across multiple counterparties.
In this context, the PFMI has recommended the use of internationally accepted communication procedures and standards to facilitate efficient payment, clearing, and settlement. Such considerations are particularly relevant for cross-border financial communications,
which help identify counterparties and securities numbering processes.
The primary and predominant reason for DLT‑legacy interoperability is to enable smart contracts (on‑chain) to use an oracle to fetch information from a legacy system (off‑chain), format it, validate it and store it on the blockchain where it can be used
to trigger some type of agreement. The reverse use case also exists, whereby on‑chain information or some type of command from a smart contract is sent to an external system that uses it for further processing or to act in the real world.
Ultimately, the full power of legacy‑DLT interoperability is unlocked when abstraction is used to blur the boundaries between the DLT and the legacy environments.
The solution may be adopting an open‑source secure blockchain middleware, wherever the use of blockchain is relevant, that provides legacy systems with universal access to current and future blockchain environments without needing to restructure or rebuild
any mission‑critical internal backend infrastructure.
The evolution of payment and settlement systems has reached another major crossroad with the emergence of DLT, but many important questions remain:
- When would such new technologies be mature enough to move from controlled experiments to implementation?
- Could the public policy objectives of safety and efficiency be fully observed with the replacement of legacy infrastructures with DLT-based systems or the introduction of innovative service offerings from new entrants in the market?
- What new interpretations may be needed under existing international standards?
- What are the implications for regulation, supervision, and oversight in a world that is moving toward a greater real-time settlement, flatter structures, continuous operations, and global reach?
Distributed Ledger Technology Experiments in Payments and Settlements, IMF
Switzerland Financial Sector Assessment Program: Technical Note— Supervision and Oversight of Financial Market Infrastructures.” IMF Country Report
Committee on Payment and Market Infrastructures (CPMI). 2017. “Distributed Ledger Technology in Payment, Clearing, and Settlement.” Bank for International Settlements, Basel.
Bank of Canada, Bank of England, and Monetary Authority of Singapore (BOC, BOE, and MAS). 2018. “Cross-Border Interbank Payments and Settlements: Emerging Opportunities for Digital Transformation.” KPMG Services Pte. Ltd.
Committee on Payment and Market Infrastructures. 2019. “Wholesale Digital Tokens.” Bank for International Settlements, Basel
Society for Worldwide Interbank Financial Telecommunication (SWIFT). 2016. “SWIFT on Distributed Ledger Technologies: Delivering an Industry Standard Platform through Community Collaboration
R3, Blockchain: 2020 Vision https://www.r3.com/wp‑content/uploads/2020/01/blockchain_2020_vision_shaping_enterprise_blockchain_adoption.pdf