BIS Economist Proposes DLT-Based Financial Market Monitoring


An economist of the Bank for International Settlements (BIS) has proposed new ways of supervising financial risks through distributed ledger technology (DLT).

In a recently released working paper, economist Raphael Auer made the case for so-called embedded supervision, which would automatically monitor tokenized markets. This would purportedly eliminate the need for the collection, verification and delivery of companies’ related data.

New forms of transparency and data credibility

Per the report, DLT and smart contracts can facilitate the development of financial markets through new forms of transparency and data credibility, and eventually exclude middleman-based data verification. To achieve these goals, embedded supervision aims to use machine learning or artificial intelligence, relying on the trust-creating mechanism of decentralized markets for regulatory purposes. The paper further explains:

“If DLT-based markets were to develop, this would change the way assets are traded and how they are packaged into complex financial products. Since the information contained in the blockchain is verified by decentralised economic consensus, it could replace current processes for data delivery and verification.”

Auer states that, for regulators and lawmakers, it is necessary to establish auxiliary frameworks that govern distributed markets and their infrastructure, wherein DLT will ensure higher-quality compliance at a lower cost.

“Embedded supervision could further help maintain the confidentiality of firms and their customers, since cryptographic tools can be used to report an institution’s aggregated financial exposures to the supervisor without disclosing the underlying individual transactions,” the paper concludes.

Global companies go for DLT-based ecosystems

Earlier this year, the BIS stated that at least 40 central banks across globally were conducting research projects and pilots with blockchain technology that aim to address such issues as financial inclusion, payments efficiency and cybersecurity.

In March, Deutsche Borse Group, Swisscom, and Swiss and Singapore-based fintech company Sygnum entered into a strategic partnership to build a DLT-based ecosystem to support the nascent tokenized economy, which, the partners contend, “has the potential to reshape global financial markets.”

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