09 November 2018

BIS: Distributed ledger technology and large value payments: a global game approach

Presentation by Mr Hyun Song Shin, Economic Adviser and Head of Research of the BIS, at the conference on "Cryptocurrencies and Blockchains", regarding distributed ledger technology and large value payments.

Payment systems built around distributed ledger technology (DLT) operate by maintaining identical copies of the history of payments among the participant nodes in the payment system. Cryptocurrencies are perhaps the best-known example of the application of DLT, but the applicability of the technology is much broader. Payment systems based on DLT are compatible with oversight by the central bank, and several central banks have conducted successful trials of interbank payments. In these trials, payment system participants transfer digital tokens that are redeemable at the central bank and use DLT to transfer them to other system participants. Decentralised consensus is achieved through agreement of a supermajority of the participants (typically 75-80%) who collectively validate payments.

Nevertheless, the technology by itself does not overcome the credit needs of the payment system to maintain settlement liquidity. In conventional real-time gross settlement (RTGS) payment systems, the value of daily payments can be over 100 times the deposit balance maintained by the system participant at the central bank. As such, incoming payments are recycled into outgoing payments, and credit provided by the central bank supplements private credit from outside the payment system for the smooth functioning of the system as a whole.

Mr Hyun Song Shin examines the liquidity properties of decentralised payment systems in an economic model of payments, in which the cost of credit to finance payments enters explicitly.

The solution shows that successful coordination is possible in a decentralised setting, but only within a narrow range of fundamentals. The solution is highly sensitive to the cost of credit, and the decentralised equilibrium outcome often fails to reproduce the high-volume payment outcomes that are more normal with central bank balance sheet backing.

Full speech

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