The Economics of Distributed Ledger Technology for Securities Settlement

33 Pages Posted: 24 Aug 2017

See all articles by Evangelos Benos

Evangelos Benos

Bank of England

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics

Pedro Gurrola-Perez

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: August 22, 2017

Abstract

Distributed ledger technology (DLT) is a database architecture which enables the keeping and sharing of records in a distributed and decentralized way, while ensuring its integrity through the use of consensus-based validation protocols and cryptographic signatures. In principle, DLT has the potential to reduce costs and increase the efficiency of securities settlement, the ultimate step of every security transaction. In this paper, we first examine to what extent DLT could add value and change securities settlement. We then characterize the innovation process in the post-trade industry and finally, we describe the economics of a hypothetical DLT-based security settlement industry.

Our main conclusions are that:

i) DLT has the potential to improve efficiency and reduce costs in securities settlement, but the technology is still evolving and it is uncertain at this point what form, if any, a DLT-based solution for securities settlement will ultimately take,

ii) technological innovation in the post-trade industry is more likely to achieve its potential with some degree of co-ordination which could be facilitated by the relevant authorities, and

iii) if DLT-based securities settlement becomes a reality, then it is likely to be concentrated among few providers which, in the absence of regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus.

Keywords: distributed ledger technology, securities settlement, innovation, market power

JEL Classification: O32, L13, D62

Suggested Citation

Benos, Evangelos and Garratt, Rod and Gurrola-Perez, Pedro, The Economics of Distributed Ledger Technology for Securities Settlement (August 22, 2017). Available at SSRN: https://ssrn.com/abstract=3023779 or http://dx.doi.org/10.2139/ssrn.3023779

Evangelos Benos

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rod Garratt (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

Pedro Gurrola-Perez

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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