The US Federal Reserve published a paper this week on the application of blockchain technology to the payments, clearing and settlement sectors of the US financial system.

The paper is an excellent overview of the current system and how blockchain might change things. Section 2.1 provides explanations of payment processing, securities post-trade processes and the roles of financial intermediaries. From the section on settlement:

After clearing comes settlement, during which the relevant delivery and payment obligations of the counterparties to the securities, commodities, or derivatives transaction are discharged. For example, in a securities transaction, settlement occurs when securities are delivered to the buyer and funds to the seller. Depending on the commodity and terms of settlement, commodities transactions may involve settlement of only funds obligations, or it may also involve the delivery of financial instruments, other documents, or even a physical commodity (e.g., precious metals, oil, wheat, etc.). The settlement of derivatives contracts other than commodity contracts also depend on the type of derivative and terms of settlement. Finality of each leg of the transaction occurs when the transfer is irrevocable and unconditional. When there are multiple legs in a transaction, delivery versus payment (DvP) mechanisms are often used to coordinate settlement of the different legs, as well as manage the risk that one leg settles with finality when the other does not.

Page 14 has a concise explanation of smart contracts:

Smart contracts are coded programs that are used to automate pre-specified transactional events based on agreed upon contractual terms. Like with traditional contracts, a smart contract depends on participants’ consent to its terms. These agreed-upon smart contracts can be used in conjunction with a distributed ledger to self-execute based on information received in the distributed ledger or from other sources. For example, several companies developing DLT products are exploring the use of smart contracts to model corporate debt issuances.

There are further comments about smart contract legal issues on pgs. 28-29 (s. although they're not as thorough as the other sections of the paper.

Section 5.3.1 on pg 25 notes the important distinction securities held directly and securities held by a custodian (e.g. Computershare in Canada).

This is a great foundational paper for future academic work or position papers.


The Federal Reserve chose to use the term "Distributed Ledger technology" (DLT) but the way they use it is what is known more commonly as "blockchain technology". Section 3 on pg. 10 explains the terminology.

Governor Lael Brainard gave a speech last week that covers similar ground at the Conference on Financial Innovation at the Board of Governors of the Federal Reserve System: