Bank of England DLT Challenge finds trade offs for wholesale settlement

Last year the Bank of England and BIS Innovation Hub launched the DLT Innovation Challenge to explore how blockchain technology could be used for wholesale payments and settlement. Yesterday it published a report on the findings. The Challenge looked at the interaction between technical DLT design choices and the policy goals expected of systemically important financial market infrastructure, bringing together financial institutions, technology firms and academics.

Participants included Ava Labs, Chainlink/Aave Labs, Circle, Digital Asset/KPMG, Hedera, HSBC, Kaleido, Rayls and the Scottish Centre of Excellence in Digital Trust and DLT, with partners Siccar, Nethermind and TrackGenesis.

The Challenge explored four topics: settlement finality and security; scalability; network and asset control; and interoperability. In most cases, there are ways to achieve the goals, but with trade offs. The report is thorough but technical, so we focus here on a few areas most relevant to the Bank’s policy work.

Taking the example of settlement finality, the reason why most blockchains lack instant settlement finality is the need to arrive at consensus, which takes time. The report focused exclusively on technical settlement finality rather than whether any arrangement would meet UK statutory requirements for legal finality. The paper explores various ways to improve speed, such as reducing the number of validators, centralizing the ordering of transactions or adopting particular consensus mechanisms. It found trade offs with most approaches. For example, it’s widely known that the greater the number of independent validators, the more secure a network is. So fewer validators mean transactions settle faster but the network becomes more susceptible to malicious actors, centralization of control or network interruption owing to validator failures.

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