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(Kitco News) - The integration of blockchain technology into the financial system continues to progress as the Bank for International Settlements (BIS) Innovation Hub London Center has announced the completion of a pilot test conducted in conjunction with the Bank of England exploring distributed ledger technology (DLT)-powered payment settlements.
Project Meridian was designed to explore how rapid advances in financial technology could deliver innovations in real-time gross settlement (RTGS) systems, which form the foundation of modern electronic payment systems.
According to a report published by the BIS on Wednesday, the joint pilot project successfully completed the purchase of houses in Wales and England through the synchronization network using DLT.
“Synchronized settlement is the conditional transfer of funds in an RTGS system and assets or funds on another ledger,” the report said. “It has the potential to reduce the time, costs and risk associated with settling transactions for a wide range of assets. It eliminates the risk of a counterparty failing to hand over ownership of an asset (“settlement risk”).”
Synchronization model. Source: BIS
Synchronized settlement can also be used to reduce liquidity costs “by cutting the amount of time that assets need to be reserved for a specific transaction.”
Project Meridian involved a prototype that develops a synchronization network using DLT. “The prototype demonstrates how a DLT network can connect to the resilient and secure centralized systems of actors in a transaction – including the RTGS operator – using open standard application programming interfaces (APIs),” the report said.
In the pilot program, the Meridian prototype was used to conduct English and Welsh housing transactions.
Steps in the synchronized settlement of housing transactions. Source: BIS
To digitize the process, a “digital deed” was created to represent the properties in question. The Meridian prototype was successfully able to settle multiple transactions simultaneously through the introduction of a common “chain identifier” in messages sent to the RTGS system, the report said.
“The Meridian prototype demonstrates that the benefits of synchronisation could be realised by digitally orchestrating settlement,” the BIS wrote. “Digitisation reduces uncertainty by giving greater clarity to all actors in a transaction.”
The key insights gleaned from Project Meridian were noted by the BIS in the following graphic.
Key insights from Project Meridian. Source: BIS
Moving forward, the BIS and BOE plan to test synchronization and the Meridian system in a number of asset markets, including housing transactions, corporate actions, securities settlement, cross-border payments and foreign transactions.
Areas of concern that still need to be addressed include the mechanics of identity verification and restrictions to synchronization services due to RTGS operating hours.
“Project Meridian has demonstrated that synchronized settlement in central bank money can be achieved for a house purchase in England and Wales,” the BIS wrote. “The project concludes that synchronization is a relatively simple way to reduce the time, costs and risks of a transaction. Central banks and RTGS operators can consider the benefits of this approach alongside others that improve payment infrastructures to improve wholesale settlement. Synchronization can provide a catalyst for innovation in wholesale payments and support the emergence of new payments infrastructures that settle using central bank money.”
