The Federal Reserve is keeping an eye on blockchain and itspotential impact on financial markets, according to Fed Governor Lael Brainard.
"We are paying close attention to distributed ledgertechnology, or blockchain, recognizing this may represent the most significantdevelopment in many years in payments, clearing, and settlement," shesaid.
Brainard outlined the use cases of distributed ledgertechnology in several areas of the payment space.
In cross-border payments, the technology could providefaster processing and cut costs, she said. Similarly, in trade finance, itcould enable quicker processing and reduce costs related to "issuing andtracking letters of credit" and related documents.
Within securities markets, clearing and settlement with asingle, master record shared at the same time between users could be"compelling," Brainard said.
"Sharing one immutable record may have the potential toreduce or even eliminate the need for the reconciliation of multiple recordslinked to a single trade among and between dealers and otherorganizations," she said. "In concept, such technology could lead togreater transparency, reduced costs and faster settlement."
Distributed ledgers may help facilitate "exchange,clearing and settlement of obligations" in paper-based commodities andderivatives markets, according to Brainard.
The Fed governor acknowledged that the industry remains in a"proof of concept stage" with regards to distributed ledgertechnology. Before being implemented in today's complex financial markets,these proofs of concept must be demonstrated in "real-worldsituations," Brainard stressed.
"Many potential applications are in their infancy, andthe industry may still be several years away from an application that is readyto be fully implemented," she said. "Even so, the industry seems tobe making announcements daily on new proofs of concept and progress that maylead to pilots, so that timeline could accelerate."