computerized financial communication. as automation has evolved, payment, clearing, and settlement systems have been developed for conducting and processing transactions within and between firms. however, many of these systems have historically operated in silos, which can be hard to streamline or replace. in some areas, business processes may still rely heavily on manual or semi - automated procedures. over time, banks and other firms have organized various types of clearinghouses to coordinate clearing and settlement activities in order to reduce costs and risks. the adoption of multilateral clearing in the united states was a key organizational innovation that began with the founding of the new york clearing house in the 1850s. this led to notable efficiencies and risk reduction in the clearing of checks. multilateral clearing was also used early on to improve clearing in the securities and derivatives markets. by the 1970s, the bis central bankers ’ speeches united states turned to technologies based on the centralized custody and clearing of bookentry securities in order to respond to the paperwork crisis in the equities markets. following the recent financial crisis, the united states - - along with many other countries - - expanded the scope of central clearing to help address problems in the bilateral clearing of derivatives contracts. today, the possible development and application of distributed ledger technology has raised questions about potentially far reaching changes to multilateral clearinghouses and the roles of financial institutions as intermediaries in trading, clearing, and settlement for their clients. in the extreme, distributed ledger technologies are seen as enabling a much larger universe of financial actors to transact directly with other financial actors and to exchange assets versus funds ( that is, to " clear " and settle the underlying transactions ) virtually instantaneously without the help of intermediaries both within and across borders. this dramatic reduction in frictions would be facilitated by distributed ledgers shared across various networks of financial actors that would keep a complete and accurate record of all transactions, and meet appropriate goals for transparency, privacy, and security. at this stage, such a sea - change may sound like a remote possibility, particularly for the high volume and highly regulated clearing and settlement functions of the wholesale financial markets. but profound disruptions are not unprecedented in this arena. in the early 1960s, the use of computerized book - entry securities systems to streamline custody, clearing, and settlement in the securities markets may have seemed like a technologist's pipe dream. but these technologies became an important part of industry - wide changes in the 1970s. today we rely on these

current correspondent banking are cited as specific potential benefits. reducing intermediation steps in crossborder payments may help reduce costs and counterparty risks and may additionally improve financial transparency. in securities clearing and settlement, the potential shift to one master record shared among participants has some appeal. having one immutable record may have the potential to reduce or even eliminate the need for reconciliation by avoiding duplicative records that have different details related to a transaction that is being cleared and settled. this also can lead to greater transparency, reduced costs, and faster securities settlement. likewise, digital ledgers may improve collateral management by improving the tracking of ownership and transactions. for derivatives, there is interest in the potential for digital ledger protocols to enable selfexecution and possibly self - enforcement of contractual clauses, in the context of " smart contracts. " as we engage with industry and stakeholders to assess the potential applications of digital ledger and related technologies in the payment, clearing, and settlement arena, we will be guided by the principles of efficiency, safety and integrity, and financial stability. efficiency many are excited about the potential for these new technologies to reduce costs and frictions, such as those associated with collateral management and custodial services, reduce settlement risk, enhance security, increase transparency, and offer new services. but there are also concerns about the costs and risks from the early adoption of rapidly evolving and uncertain technologies and technological hurdles in integrating new technologies into legacy systems and achieving interoperability across different ledgers and networks. there are questions about the need for substantial new investments to obtain capabilities like realtime processing where these capabilities already exist at some of the industry's core infrastructures. there are also cautions that realizing the full potential of distributed ledger technologies could take many years. much of the case for adopting distributed ledger technologies revolves around achieving greater efficiency and reducing time and risks to post - trade clearing and settlement. but first, important technological challenges will need to be addressed to permit widespread adoption and migration away from legacy systems and networks. these include the need for standardization, the development of protocols that will permit interoperability between other ledgers and networks, and the reduction of computational intensity and costs. moreover, distributed ledgers will have to compete with other options and priorities of financial firms and clearinghouses in a highly regulated financial ecosystem. thus, a major threshold question for the adoption of distributed ledger technology within and between groups of firms engaging in particular types of transactions is whether the advantages outweigh the costs of replacing legacy