Distributed Ledger Technology and the Future of Payment Services

Technological evolution triggers changes in market demands, inviting the incumbents of the financial infrastructure to innovate and enhance time and cost efficiency. In a world of internet-based services without sovereign barriers and global peer-to-peer networks, the current account-based infrastructure seems outdated and overcomplicated. Distributed Ledger Technology (DLT) introduces a different logic for validation, settlement and record-keeping and provides a promising prospect of modernization of payment services. Major players of payment, clearing and settlement services and central banks are investing in DLT envisaging high-tech, resilient and time-efficient payment systems. This paper provides an analysis of the potential of distributed ledger technology to reconfigure payment services by introducing changes in different parts of the value chain. Its objective is to connect this potential with current legal and technological developments and conceptualize the future of payment services. Part A provides an overview of current payment, clearing and settlement systems in the context of both domestic and cross-border transactions and stresses the multiple levels of intermediation, as well as the externalities for end-users. Part B seeks to explain why Distributed Ledger Technology bears promises for a more efficient payment services infrastructure and how payments are executed, settled and recorded. Part C explores different scenarios under which Distributed Ledger Technology could be used to enhance payment services. These range from complete disintermediation and a “payments democracy” to the scenario that payment and settlement systems remain intact and DLT is used solely to enhance internal record-keeping or financial telecommunications. This part seeks to connect the hypotheses for the adoption of DLT in payment services with recent developments and investments in innovation and technology. Part D focuses on one of the aforementioned scenarios. Academics and regulators are investigating the plausibility of a regulated distributed ledger, where banks will serve as nodes and will continue providing services to their clients. This part discusses the advantages of this idea, as well as the regulatory and scalability requirements to make it feasible. Part E presents efficiencies and implications of a regulated distributed ledger providing payment services from a payment economics perspective. Governance issues and legal implications (data protection, enforceability of private law rights, systemic risks) are not part of this analysis.