As global financial markets increasingly adopt distributed ledger technology (DLT) and digital assets, the need for technological interoperability is clear: frictionless global payments and financial transactions require systems that can speak to each other. The vision for the digital markets of the future and how to achieve this interoperability, however, is less clear, according to speakers at the Atlantic Council’s panel “Moving Money: Domestic and International Interoperability”.
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DTCC’s Jennifer O’Rourke, Executive Director, Innovation Strategy, joined a panel of experts – including Federico Grinberg, Senior Economist, IMF; Tony McLaughlin, Emerging Payments and Business Development, Citi; Tom Zschach, Chief Innovation Officer, SWIFT; and Jordan Bleicher, Senior Advisor to the Under Secretary for Domestic Finance, U.S. Department of the Treasury – to discuss the challenges, opportunities, and limits of digital ledger technology in the payments space
The panelists voiced the need for industry collaboration to address the interoperability challenge and avoid siloed technologies and platforms, which would only recreate the problems of the past: increasing transaction costs and limiting the benefits of trading. Moderator Ananya Kumar, Associate Director, GeoEconomics Center, Atlantic Council, pointed out, though, that two distinct approaches to, or models of, interoperability were evident in the discussion: a single, common global technology standard or platform, or bridges and linkages that connect the various platforms.
Firms’ earlier technology decisions around DLT already are creating a fragmented marketplace, O’Rourke cautioned. Looking at the projects that are closest to production, “What we’re seeing across the globe are smaller DLT deployments at subscale that have isolated liquidity pools,” she said. “This disparate marketplace is going to challenge our ability for a harmonized global solution.”
Avoiding a Digital Island
The panelists agreed that market participants and key stakeholders need to work together now to identify the right use cases and ensure the benefits of implementing DLT outweigh the risks.
The industry can’t just “flip the switch” on a new platform, SWIFT’s Zschach noted, and must focus on interoperability first. New solutions must consider access to established payment rails to avoid creating a “digital island,” which would only increase fragmentation and slow adoption.
The potential for new digital currency solutions to enable greater access to financial services and to introduce cross-border efficiencies must be balanced with the risks that new forms of money can create, IMF’s Grinberg said. That includes new cyber-risks as well as traditional risks such as bank disintermediation, which could increase volatility.
DLT is not the answer to every problem, Citi’s McLaughlin added. It’s important to ask what DLT does better than traditional financial services when identifying use cases. Originally introduced to power trustless transactions, many blockchain capabilities may not be effective or desirable in the regulated financial markets.
The Toothpaste is Out of the Tube
While there still are many unknowns, the conversation already has moved beyond “should we use DLT?” to “how and where should we use it?”
DTCC completed a successful pilot with the Digital Dollar Project in 2022. The test helped DTCC evaluate both the multinetwork approach to interoperability as well as the architectural elements of a solution. “There are so many open issues around these architectural decisions right now,” O’Rourke said. “How do we connect networks that have been built up with different architectural approaches in mind?”
A pragmatic approach to interoperability will have to recognize that “the toothpaste is out of the tube,” she said. “There already are single-asset networks that exist today. DTCC’s job as a Financial Market Infrastructure, or an FMI, is to support connecting those networks together.” Following the pilot, DTCC created a sandbox to continue testing client DLT use cases and connectivity solutions.
IMF’s Grinberg acknowledged the real-world challenges of achieving a single global standard, but he pointed out that the proliferation of bridges and interlinking systems could create inefficiencies, added costs, and new operational risks, particularly for smaller players. If one standard is not realistic, the industry’s aim at least should be compatible systems and technologies that comply with common standards to limit the number of connections, he said.
It’s still too early to tell which interoperability model will win, according to Zschach. A single, harmonized platform is compelling, and SWIFT is working with industry players to explore the possibilities. But SWIFT also launched a sandbox to explore a technology-agnostic interlinking solution. “We want to help the industry and the community figure out the right way to [enable interoperability],” Zschach said.
The Market Is Watching
The current uncertainty around the right architecture creates a problem for businesses, DTCC’s O’Rourke said. “Banks and market participants can’t afford to invest in multiple, competing solutions.” Starting down the road with one solution creates enormous technological debt that makes it hard to change directions later.
“The market is watching,” O’Rourke said. How do we help them make these hard technology decisions when we know the technology is likely to evolve?
Without a crystal ball to predict the future solution landscape, DTCC is looking to the market itself and current developments for direction. “The marketplace has already created distinct networks that are predominantly single asset,” O’Rourke said. “We have to figure out how we can connect those together.”
Prioritizing Immediate Needs
While bridging the gaps among disparate technologies may not be as visionary or as efficient as a single, harmonized global marketplace, the approach addresses market participants’ immediate business needs, O’Rourke stressed. “Right now, we’re seeing localized solutions that are creating a fragmented marketplace.” As a result, DTCC currently is focusing on bridging solutions – though it ultimately will support whichever approach, or approaches, clients and the market adopt.
“The industry needs to take a collaborative approach to addressing some of the significant open issues that we still have around access, standards and interoperability,” O’Rourke said.
“There already are organizations and governments that are moving forward quickly with a very significant amount of velocity around creating their own solutions,” she continued. “If we are silent or if we don’t have a stronger voice in this conversation, then we may be … reverse engineering into solutions that already have been created and markets that already have been accessed, as opposed to dictating a best practice that could really move the ball forward. That collaborative conversation needs to happen now.”