On Tuesday, the European Central Bank and the Bank of Japan released a joint report on part two of Project Stella, which focused on securities settlement systems: delivery versus payment (DvP) in a distributed ledger environment. Although securities settlement is conceptually possible in single-ledger or cross-ledger DvP systems, the banks said that additional study would be required.
Project Stella is a joint research effort by the Bank of Japan (BOJ) and the European Central Bank (ECB) on distributed ledger technology (DLT) for financial market infrastructures.
On March 27, 2018, the BOJ and ECB shared findings from Project Stella’s second phase, which studied “how the settlement of two linked obligations, such as the delivery of securities against the payment of cash, could be conceptually designed and operated in an environment based on DLT.”
In slightly simpler terms, when two people execute a trade, how can we make sure that the first person definitely receives their stock and the second person definitely receives their cash? This is a game theory question, and the banks thought that a delivery versus payment (DvP) system based on DLT could provide a solution.
Linking asset transfers so that the transfer of one asset occurs if and only if the transfer of the other asset occurs is a condition referred to in computer science by the term “atomicity” (hence the more familiar phrase “atomic swaps”). The banks explained, “The outcome of settlement is either both parties successfully exchanging those assets, or no transfer taking place.”
For Project Stella, prototypes for DvP on DLT were developed using Corda, Elements, and Hyperledger Fabric.
The ECB and BOJ had three main findings:
- DvP can run in a DLT environment subject to the specificities of the different DLT platforms;
- DLT offers a new approach for achieving DvP between ledgers, which does not require any connection between ledgers; and
- Depending on their concrete design, cross-ledger DvP arrangements on DLT may entail certain complexity and could give rise to additional challenges which would need to be addressed.
The study did not address legal aspects.
The ECB and BOJ released findings on phase one of Project Stella in September 2017.
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