Blockchain technology has been touted for its potential to revolutionize many aspects of financial markets, including securities clearing and settlement systems. Stock exchanges in countries including Australia and Switzerland have announced plans to implement blockchain technology in securities trading over the next couple of years, while other jurisdictions (e.g. Singapore and Canada) have also studied similar uses for blockchain. However, despite blockchain’s potential, to date its practical use in these areas has yet to fully materialize and it remains unclear whether blockchain can be useful in securities clearing and settlement.
The optimal blockchain design for securities transactions differs significantly from the original blockchain designed for Bitcoin and other cryptocurrencies. While Bitcoin’s blockchain intentionally introduces speed bumps to ensure the security of its ledger, such features are not necessarily appropriate for securities settlement, where real-time settlement of transactions is the ultimate goal. Various studies have attempted to illustrate how delivery versus payment can be achieved on a distributed ledger, but the realization of blockchain’s potential for optimizing both speed and security of securities transactions at low cost remains unclear.
The Committee on Capital Markets Regulation is encouraged by the general focus on improving clearing and settlement systems, but believes the question remains open as to whether blockchain technology provides the best framework for doing so. We strongly recommend that securities regulators and policymakers collaborate with market participants (broker-dealers, exchanges, and clearinghouses) and continue to push the research forward in how to improve the existing securities clearing and settlement system, considering blockchain but also recognizing that blockchain technology may not be necessary to do so. This brief report provides an overview of the relevant blockchain technologies and examines several of the issues that arise when attempting to integrate blockchain into clearing and settlement systems. The full report can be found here.