A distributed ledger (DL) “is a database of which there are multiple identical copies distributed among several participants, which are updated in a synchronized manner by consensus of the parties”[1].
An important peculiarity of this technology is that there is no central authority in charge of controlling the database, so the system is updated by mutual agreement between the parties that participate in it, according to rules shared by all the participants that govern the operation of the system.
The best known application of distributed ledger technology to the financial system is that of crypto assets and, more specifically, that of cryptocurrencies, although in recent years initiatives related to areas in which there are complex processes where many players are involved have proliferated.
Other areas of application of this technology could be payment services, securities settlement and clearing, real estate registration or even signing contracts.
Distributed ledger systems offer the following opportunities for the financial system[2]:
- Elimination of courier costs and reduction of back-office costs.
- Reduction in the complexity of transactions.
- Greater traceability and transparency.
- Immutability, that is, once the transaction is recorded it cannot be modified.
- Data integrity and security.
- Privacy: Public networks vs. open networks.
- Increased process speed (and improved liquidity management).
In addition, opportunities may arise for Public Governments in the following matters[3]:
- Reduction in the cost of transactions, including fraud and error in payments.
- Greater transparency in transactions between companies and citizens.
- Greater financial inclusion.
- Reduction of costs aimed at the protection of citizens’ data, improvement of the possibilities to share data between bodies and possible creation of “data markets”.
- Protection of critical infrastructures (bridges, tunnels…).
- Facilitation of relations between SMEs and Public Governments.
However, distributed ledgers offer advantages, risks and limitations beyond those linked to the products in which they are being used[4]:
- They are not scalable enough.
- Its robustness and resilience have not been sufficiently proven (system congestion due to the existence of a high number of waiting transactions cannot be ruled out, which is an element that is more easily guaranteed by centralized systems).
- They have not completely solved the problem of the necessary trust of the participants.
- They are not always interoperable with each other or with traditional infrastructures.
- Its operation poses challenges of a legal nature (for example, in the financial sphere, the firmness of transactions).
- They show security weaknesses: Loss of private code; “51% attacks”, which means that the system cannot be controlled as long as a single person does not reach at least 51% of the computing power.
- The governance system is not always adequate.
- In some cases, their operation entails a very high environmental cost (according to some calculations, the annual energy consumption for the validation of transactions —mining process— is equivalent to that of a country like Chile).
[1] Bank of Spain (2018): “Tecnología de registros distribuidos (DLT): una introducción”, Boletín Analítico 4/2018.
[2] Bank of Spain (2018): “Tecnología de registros distribuidos (DLT): una introducción”, Boletín Analítico 4/2018.
[3] UK Government Chief Scientific Adviser (2016): “Distributed Ledger Technology: beyond block chain”, Government Office for Science.
[4] Bank of Spain (2018): “Tecnología de registros distribuidos (DLT): una introducción”, Boletín Analítico 4/2018.
