In its highly anticipated report on Blockchain technology, the Federal Reserve described the potential of the distributed ledger technology (DLT) in the settlement of payments, assets and clearing, emphasizing the importance of immutability, transparency and proper security measures.

Fed’s interest in Blockchain

The Federal Reserve is interested in the implementation and integration of Blockchain or distributed ledger-based systems for transaction settlement and clearance. The Fed noted that if US PCS systems, that process around 600 mln transactions worth $12.6 trillion annually, adopt emerging technologies like Blockchain, more secure, efficient and transparent methods of settlement and clearance can be developed.

The report read:

“The Federal Reserve has a public policy interest in understanding and monitoring the development of innovations that could affect the structural design and functioning of financial markets.”

More importantly, the report stated that the Fed research team already held discussions with financial institutions, banks and other parties that might be interested in integrating DLT systems for asset settlement and clearance. In addition, the Fed research team conducted interviews with 30 industry leaders in regards to the potential, development and implementation of DLT systems.

“As a preliminary step to understanding the implications of DLT developments in payments, clearing and settlement, a team of Federal Reserve staff (FR research team) held discussions with a broad range of parties that are interested in, participate in, or are otherwise contributing to the evolution of DLT,” the report added.

Interest in permissioned ledger

In section 3.2, the Fed research team provides their thoughts and evaluation of both permissioned and permissionless ledger-based systems.

Essentially, a permissionless ledger is a decentralized Blockchain network like Bitcoin, in which no parties hold excessive control over the network. In comparison, a permissioned ledger is a Blockchain network which provides certain parties with particular control over the network, allowing the alteration and manipulation of data points.

In the paper, the Fed acknowledges that the financial industry is interested and looking forward to the development and implementation of permissioned ledgers or centralized Blockchain systems.

The Fed states:

“Cryptocurrency DLT arrangements such as Bitcoin are examples of permissionless systems. The financial industry, however, is focused mainly on developing permissioned systems because these systems offer a way to provide controls over important functions performed in the arrangement.”

Throughout the paper, the Fed continues to emphasize the use case of permissioned ledgers, describing the potential of the technology within the financial industry.

However, in section 4.2, the Fed research team notes the importance of transparency and immutability for transaction record keeping. It also states that DLT reduces operational and financial risks.

It fails to describe that a Blockchain or distributed ledger network cannot be centralized or permissioned and maintain its immutability. For it to operate as a permissioned ledger or a centralized database, it has to compromise security and therefore eliminates the immutable characteristic of the Blockchain technology.

Interestingly, the Fed also states that Blockchain is only a type of DLT. Throughout the article, the Fed continues to refer to Blockchain technology as DLT.

The Fed states:

“One specific type of distributed ledger is a Blockchain, which adds changes to the database via a series of blocks of transactional data that are chronologically and cryptographically linked to one another. The terms “distributed ledger technology” and “Blockchain technology” are often treated as synonyms in the industry even though Blockchain is actually a specific type of distributed ledger.”