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Review

Blockchain Application to Financial Market Clearing and Settlement Systems

by
Nipun Agarwal
1,
Pornpit Wongthongtham
1,*,
Neerajkumari Khairwal
2 and
Kevin Coutinho
2
1
School of Business, University of Notre Dame, Sydney 2007, Australia
2
L1X Foundation, c/o Sielva Management SA, Gubelstrasse 11, CH-6300 Zug, Switzerland
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2023, 16(10), 452; https://doi.org/10.3390/jrfm16100452
Submission received: 29 September 2023 / Revised: 17 October 2023 / Accepted: 18 October 2023 / Published: 20 October 2023
(This article belongs to the Special Issue Fintech, Financial Markets, Supply Chain Management & Leadership Risk, Financial Management)
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Abstract

:
Blockchain technology has emerged as a transformative force in the financial industry, offering the potential to streamline and enhance financial markets’ clearing and settlement processes. This paper explores the application of blockchain technology in these critical areas. We examine traditional clearing and settlement procedures, the challenges they pose, and how blockchain can address these issues. Through case studies and technical insights, we illustrate the benefits and limitations of implementing blockchain solutions. This paper utilizes the PRISMA method to survey papers related to blockchain-based clearing and settlement systems, while using Science Direct to identify papers that have been published in this area. These papers were reviewed to identify themes that relate to extending blockchain development for clearing and settlement system in financial markets. As a result, this paper also shows how the Layer One X (L1X) blockchain can be applied to develop financial markets clearing and settlement systems.

1. Introduction

The financial industry has been undergoing a significant revolution driven by technological advancements in blockchain and artificial intelligence in recent years. Blockchain technology based on distributed ledger technology (DLT), which was originally developed as the underlying technology for cryptocurrencies (for example, bitcoin), has captured the attention of financial institutions worldwide (Allen et al. 2022). As a result, the potential for blockchain to revolutionize the financial market clearing and settlement processes cannot be underestimated (Amini et al. 2023). This introduction provides an overview of the research objectives and the significance of blockchain in financial markets. Financial market clearing and settlement processes play a critical role within the global economy, as they are the underlying infrastructure that facilitates all markets globally (Loader 2020a, 2020b). They ensure the orderly exchange of securities and funds among market participants. However, these processes have traditionally been marked by inefficiencies, risks, and delays (Loader 2020c). Blockchain technology, with its decentralized, transparent, and secure characteristics, has emerged as a promising solution to address these challenges.
The financial markets are the lifeblood of the global economy, facilitating the allocation of capital, investment, and risk management (Walch 2018). Within this complex ecosystem, clearing and settlement processes are the critical underpinnings that ensure the secure and efficient transfer of financial assets between buyers and sellers (Li et al. 2023). These processes involve the confirmation, matching, and ultimate transfer of securities and funds, typically mediated by intermediaries like clearinghouses (Loader 2020b; Renduchintala et al. 2022). While indispensable, these traditional systems have long faced challenges that impede their effectiveness. The gap in the literature shows that existing financial market clearing and settlement systems are legacy applications and more efficient, secure, and lower costs systems are required in this area. As a result, the introduction of blockchain might be a reasonable alternative to build more efficient financial market clearing and settlement systems.

2. Challenges in Traditional Clearing and Settlement

Traditional clearing and settlement systems have been hindered by inefficiencies, risks, and costs—mainly as they are legacy systems. These challenges are predictable and have existed for decades:
  • Counterparty Risk: One of the foremost issues is counterparty risk, where a party involved in a financial transaction may default, leading to financial losses for counterparties. The financial crisis of 2008 exposed the magnitude of this risk when the collapse of the Lehman Brothers led to a cascade of defaults (Ali et al. 2020; Blake and Cairns 2021; Carapella and Monnet 2020).
  • Settlement Delays: The settlement of financial transactions, particularly in cross-border contexts, can take days, if not weeks. This not only ties up capital but also exposes market participants to market and credit risk during the settlement period (Ante 2021).
  • Reconciliation Issues: The multitude of intermediaries involved in the clearing and settlement process often results in discrepancies and errors. Reconciliation, a manual and time-consuming process, is required to align the records of different parties involved in a transaction (Barroso and Laborda 2022).
  • Operational Costs: The existing infrastructure, involving legacy systems and intermediaries, is expensive to maintain and operate. The costs are ultimately borne by market participants, affecting their overall profitability (Birch and Parulava 2018; Barrdear and Kumhof 2022; Carvalho et al. 2021).
The existence of these problems has urged financial industry participants to seek innovative solutions. Among these solutions, blockchain technology has emerged as a transformative force with the potential to overhaul the clearing and settlement landscape.

3. Blockchain Technology: A Disruptive Force

Blockchain technology, originally developed as the underlying technology for Bitcoin, offers a decentralized, secure, and transparent framework for managing digital transactions (Brauneis et al. 2022). The core innovation of blockchain lies in its ability to establish consensus in a trustless environment, thereby eliminating the need for intermediaries and central authorities (Bothra et al. 2023). As a result, this makes it particularly attractive for use in financial market clearing and settlement.
  • Distributed Ledgers: At the heart of blockchain technology is the concept of distributed ledgers. These are tamper-resistant, chronological records of transactions that are distributed across a network of computers. Each participant in the network has access to a copy of the ledger, ensuring transparency (Gourisetti et al. 2021; Bhaskar et al. 2015).
  • Consensus Mechanisms: Blockchains rely on consensus mechanisms, such as proof of work (PoW) or proof of stake (PoS), to validate and record transactions. These mechanisms ensure the integrity of the ledger and prevent unauthorized changes (Oprea and Bâra 2021; Benedetti and Nikbakht 2021).
  • Cryptographic Security: Transactions on a blockchain are secured through advanced cryptographic techniques. This security makes it exceedingly difficult for malicious actors to alter transaction data or compromise the network (Yin et al. 2023; Birch 2015).
  • Smart Contracts: Smart contracts, self-executing contracts with the terms of the agreement directly written into code, are a fundamental feature of blockchain technology. They can automate complex financial processes, including clearing and settlement (Zhang et al. 2023).

4. Case Studies—Application of Blockchain in Clearing and Settlement Systems

4.1. The ASX CHESS Replacement Project

The decision of the Australian Securities Exchange (ASX) to substitute its legacy CHESS system with a blockchain-based platform called the ASX CHESS Replacement project is a significant example of blockchain implementation in the financial market clearing and settlement field (Chamorro-Courtland 2021). This project aimed to replace the existing Clearing House Electronic Sub-Register System (CHESS) with a blockchain-based platform (Hewa et al. 2021).
Chamorro-Courtland (2021) explains that the primary objective of the ASX CHESS Replacement Project was to modernize and enhance the post-trade infrastructure of the Australian securities market. The ASX sought to replace its aging CHESS system, which had been in operation since the 1990s, with a more efficient, secure, and flexible blockchain-based platform. The ASX opted for a blockchain-based distributed ledger technology (DLT) to underpin the new system. The technology leveraged was not a traditional public blockchain like Bitcoin or Ethereum but rather a permissioned blockchain. In a permissioned blockchain, only authorized participants have access to the network. ASX collaborated with Digital Asset Holdings, a blockchain technology company, to develop and implement the new system. Digital Asset Holdings provided the blockchain technology stack, including smart contract capabilities.
Key Features of the ASX Blockchain System (Chamorro-Courtland 2021):
Real-time Settlement: One of the central features of the new system was its ability to facilitate real-time settlement. Unlike traditional systems that required days for final settlement, the blockchain-based system allowed for near-instantaneous transfer of assets. This significantly reduced counterparty risk and capital requirements.
Immutable Ledger: Transactions recorded on the blockchain are immutable, meaning they cannot be altered once added to the ledger. This feature enhanced transparency and reduced the risk of data manipulation.
Smart Contracts: The ASX blockchain incorporated smart, self-executing contracts with predefined rules. These contracts automated various aspects of the clearing and settlement process, streamlining operations.
Enhanced Transparency: All participants in the network had access to a single source of truth, the distributed ledger. This transparency reduced disputes, enhanced trust among market participants, and simplified reconciliation processes.
Benefits of the ASX Blockchain System (Chamorro-Courtland 2021):
Reduced Counterparty Risk: The real-time settlement and the immutability of transactions on the blockchain significantly reduced counterparty risk, making the Australian securities market safer.
Efficiency Gains: The automation of processes through smart contracts led to operational efficiency gains. Manual reconciliation efforts were minimized, reducing costs and errors.
Transparency: The transparent nature of blockchain transactions improved the overall transparency of the securities market, fostering trust among participants.
Challenges with the ASX Blockchain System (Chamorro-Courtland 2021):
Regulatory Compliance: Blockchain technology introduced regulatory challenges related to issues like data privacy, security, and compliance. ASX worked closely with regulators to ensure compliance with Australian financial regulations.
Integration: Integrating the new blockchain-based system with existing market participants and legacy systems was a complex task. Ensuring interoperability with external systems and networks was crucial.
The ASX CHESS Replacement Project was a significant milestone in the adoption of blockchain technology in financial market clearing and settlement. While the project faced delays and challenges during development, it marked a successful transition to a more efficient and secure post-trade infrastructure (Kalla et al. 2022). The implementation showcased the potential of blockchain to revolutionize clearing and settlement processes in financial markets. However, due to the high level of complexity in implementing this ASX CHESS Replacement system, there have been significant delays in implementing this system.

4.2. DTCC Project Ion

The Depository Trust & Clearing Corporation (DTCC) embarked on Project Ion to explore blockchain’s potential in the post-trade space. The DTCC Project Ion is an initiative that aims to explore and experiment with the application of blockchain and distributed ledger technology (DLT) in the post-trade space (Abel 2022). The DTCC is a significant financial market infrastructure provider, responsible for clearing, settlement, and record-keeping of a wide range of financial transactions, including equities, fixed income, and derivatives. Project Ion represents the DTCC’s efforts to leverage blockchain to enhance its core functions. Below is a detailed overview of the DTCC’s Project Ion:
Benedetti et al. (2023) explains the primary goal of Project Ion is to investigate and assess the potential of blockchain and DLT to modernize and improve post-trade processes in the financial industry. DTCC aims to understand how this technology can enhance efficiency, reduce risk, and increase transparency in post-trade operations. DTCC’s Project Ion is specifically focused on the development and experimentation of blockchain and DLT solutions. These technologies offer the potential to transform the way financial transactions are cleared, settled, and recorded. DTCC’s Project Ion involves collaboration with various stakeholders in the financial industry, including financial institutions, regulators, and technology providers. This collaborative approach aims to ensure that the solutions developed are practical and aligned with industry needs and regulatory requirements.
Key Features and Components of Project Ion (Benedetti et al. 2023):
Digital Assets: Project Ion explores the digitization of financial assets on a blockchain. This involves representing financial instruments, such as securities and derivatives, as digital tokens on a blockchain network. These digital assets can be transferred and settled more efficiently compared to traditional paper-based or electronic methods.
Interoperability: Ensuring interoperability with existing financial market infrastructure and legacy systems is a critical aspect of Project Ion. The initiative seeks to develop solutions that can seamlessly integrate with the current financial ecosystem.
Privacy and Security: Given the sensitivity of financial transactions and data, Project Ion places a strong emphasis on privacy and security. The design of the blockchain solutions includes robust cryptographic techniques and identity management to protect sensitive information.
Smart Contracts: Smart contracts, i.e., self-executing contracts with predefined rules, play a significant role in Project Ion. They automate various aspects of post-trade processes, including trade matching, clearing, and settlement.
Benefits of Project Ion (Benedetti et al. 2023):
Reduced Settlement Times: Through the use of blockchain technology, Project Ion aims to significantly reduce settlement times, potentially enabling near-real-time settlement of financial transactions.
Enhanced Transparency: Blockchain’s transparent and immutable nature ensures that all participants have access to a single, tamper-proof source of truth, increasing transparency and trust among market participants.
Risk Reduction: The reduction in settlement times and the elimination of manual reconciliation processes can help mitigate counterparty and operational risks.
Challenges and Considerations of Project Ion (Benedetti et al. 2023):
Regulatory Compliance: Like any blockchain initiative in the financial industry, Project Ion faces regulatory challenges. Ensuring compliance with financial regulations and working closely with regulators is essential.
Scalability: Achieving scalability to handle the volume of financial transactions in a global context is a significant technical challenge.
DTCC’s Project Ion is ongoing, with the organization actively exploring and experimenting with blockchain and DLT solutions. The specific outcomes and implementation details may have evolved since then. However, Project Ion represents an important milestone in the financial industry’s exploration of blockchain technology to enhance post-trade processes, and its progress is closely monitored by industry participants and regulators (Sanka et al. 2021).

5. Survey of Existing Literature on Clearing and Settlement Systems

The case studies for the ASX and DTCC explain how difficult it is to implement blockchain applications for financial market clearing and settlement in practice. The purpose of this section is to review all the literature that has been published in this area and to understand how theory interrelates with real world application of blockchain technologies in the financial markets and related industries. In order to synthesis this literature survey, this paper utilises the PRISMA (Liberati et al. 2009) process (shown in Figure 1 below), which utilises a systematic review that uses a multi-step checklist to ensure that the literature review is appropriately synthesised.
Pahlevan-Sharif et al. (2019) state that the reason for utilising the PRISMA process is to ensure the transparency, comprehensiveness, and accuracy of literature reviews. It is important to systematically work through the literature to ascertain that the study has accurately and correctly identified the literature relevant to this study. The results from this review show the 59 journal articles and book chapters that are relevant to the application of blockchain technology to financial market clearing and settlement systems. The reason this study reviews financial markets, which include electricity, carbon, stock, bond, and cryptocurrency trading, is due to the fact that application of blockchain technologies to these areas is limited. As we have reviewed the ASX and DTCC case studies provided in the section above. As blockchain application to financial markets, especially for major stock market platforms is in its infancy, we could not find any additional case studies on successful blockchain implementations in this field.

5.1. Methodology—Selection Criteria for Including Relevant Literature

While reviewing the PRISMA process, the criteria for the inclusion of studies encompasses works published in journals of the Australian Business Deans Council, which are more comprehensive than comparable journal databases, e.g., Scopus or the Social Science Citation Index (Pahlevan-Sharif et al. 2019). Additionally, we included journal papers and book chapters from the specific areas of blockchain, financial markets, and clearing and settlement systems. Finally, all the journal papers were obtained from peer-reviewed journals, and this search was run on the Science Direct site on 2 September 2023. So, only articles published prior to this date are covered by this survey. Keywords used for these searches included: “blockchain + financial markets + clearing + settlement”.
The initial search that was conducted using the three keywords (“blockchain + clearing + settlement”) provided a result of 357 articles that were then reduced to 284 articles when the fourth keyword was added to make the search more relevant (“blockchain + financial markets + clearing + settlement”). After that a manual search of all the articles was conducted to ensure that all articles and book chapters were full text, were not duplicates, and were directly relevant to the search criteria. Any papers that related to other research questions, for example, the paper by Adeyemi et al. (2020) titled “Blockchain technology applications in power distribution systems”, where the paper discusses blockchain application to power distribution and does not discuss financial markets trading or clearing and settlement systems, were removed for this literature review.

5.2. Results—List of Survey Articles

At the end, a list of 59 journal papers were identified that relate to the research area of blockchain application to financial market clearing and settlement systems.
A thematic review of the 59 articles was also conducted to understand specific topics areas that relate to clearing and settlement. This is shown in Figure 2 below. There is a lack of literature in the financial market clearing and settlement field. However, there are related articles that discuss blockchain application in different financial markets applications, blockchain smart contracts related to market infrastructure, the use of blockchain in energy markets trading or market microstructure, the use of blockchain in payments infrastructure, and the application of game-theoretic aspects to blockchain. The majority of these articles were specific to market microstructures with reference to clearing and settlement. However, some articles in the energy and financial markets fields also relate to market microstructure and blockchain technology. As theoretical research and practical application are interlinked, extending theoretical research should assist the development of new technologies and extend their application in industry settings. Therefore, it is important that further research be conducted to support the practical applications in industry of blockchain technologies. Clearing and settlement systems are critical aspects of financial infrastructure, and additional research in this space is required. Blockchain-related research in this area will be useful as blockchain naturally has a relevant application to the clearing and settlement field.
A list of these 59 papers is provided in Appendix A that reflects the literature review conducted in this study.
It should be noted that these 59 articles were published between 2018–2023, with the majority of the articles being published in the 2022–2023 period. This reveals that research on blockchain applications in financial market clearing and settlement systems is in its nascent phase and offers an opportunity for further research to be conducted in this field. The graph shown below in Figure 3 provides a breakdown of the 59 articles by journal name and year, thus revealing the most significant journals that have published articles related to blockchain, financial markets, and clearing and settlement systems. The journals that have published most consistently in this area are: Applied Energy; Research in International Business and Finance; Renewable and Sustainable Energy Reviews; and Clearing, Settlement and Custody (Third Edition).
Results of the analysis of the 59 articles yielded the following themes:
  • Blockchain offers a high level of automation, security, and fast real-time settlements through smart contract implementation and has worked efficiently in peer-to-peer energy trading markets.
  • Blockchain applications provide asynchronous pricing, resulting from Pareto optimality that help in price transparency and accommodate market participant preferences, resulting in a more efficient market.
  • Blockchain offers smart contracts that have strict agreements and are automatically implemented. Where no central parties dominate the service, there is immutability and transparency of data and transactions.
  • Research shows that there are numerous blockchains, and interoperability is required to allow for different blockchain and other applications to interface to market infrastructure.
The summary of results above shows that blockchain technology shows promise and has been applied successfully in associated fields like energy market trading. However, this research also states that numerous blockchain technologies exist and interoperability between blockchains and other applications is important to an efficiently working stock market platform. As a result, when comparing the analysis of the research with the ASX and DTCC case studies, it is important to note that blockchain technology for financial market clearing and settlement is possible.
However, the implementation of such a system is complicated. The main reason that such a complication occurs is that different market participants use different legacy and blockchain applications to connect to the stock market platform and to clearing and settlement systems. Therefore, it is important to manage this complexity and allow for interoperability within the blockchain used to develop the financial market clearing and settlement system. As a result, the following section reviews the Layer One X blockchain application that has interoperability as a critical part of its structure.

6. Layer One X Blockchain for Clearing and Settlement

As discussed in the previous sections, Blockchain technology has been making significant strides in revolutionizing various industries, and one of its most promising applications is in the realm of clearing and settlements within the financial sector. In contrast to the traditional clearing and settlement systems that are often plagued by inefficiencies, delays, and high costs, Layer One X (L1X) introduces a blockchain-oriented solution that addresses these challenges while offering a range of unique features that make it an ideal choice for clearing and settlements. This research content aims to delve into the capabilities of L1X blockchain, highlighting how it can be employed in clearing and settlements, and discussing the advantages it offers over existing solutions.

6.1. Features of L1X Blockchain for Clearing and Settlement

In this section, we will explore the distinctive features of the L1X blockchain that make it an exceptionally promising candidate for revolutionizing clearing and settlement processes in the financial industry. These features encompass interoperability, scalability, security, and customization, each playing a vital role in streamlining and enhancing the efficiency of financial transactions.

6.1.1. X-Talk

L1X introduces the concept of X-Talk, which enables native and multi-chain transactions, interaction, authentication, and validation. In the context of clearing and settlements, this means that L1X can seamlessly connect and transact across different financial networks, allowing for efficient cross-border and cross-asset settlement processes. Unlike traditional systems that require complex intermediaries, L1X simplifies the process and reduces settlement times.

6.1.2. High Throughput

Scalability is a critical requirement for clearing and settlement systems, especially in high-volume financial markets. L1X addresses this need by initially providing a remarkable 100,000 transactions per second (TPS) and allowing for exponential growth. This high throughput ensures that clearing and settlement processes can handle the demands of modern financial markets, ensuring timely and efficient transactions.

6.1.3. Pentagon Framework

Security is paramount in financial transactions. L1X’s Pentagon Framework, which includes features like deterministic behaviour of the virtual machine and randomized selection of block proposers, enhances the security of the platform. It eliminates concerns related to state updates, flash code logic validation, and accidental forking, making it a robust choice for financial clearing and settlements.

6.1.4. PoX (Proof of X) Consensus Mechanism

L1X’s PoX consensus mechanism relies on both Full Nodes and Mobile Enabled or Low CPU Powered Devices, ensuring a decentralized and secure network. This mechanism is essential for maintaining the integrity and trustworthiness of clearing and settlement processes, which are sensitive to fraudulent activities.

6.1.5. Subnets for Customization

L1X’s capability to host subnets allows governments, larger enterprises, and businesses to create custom consensus mechanisms and smart contract privacy rules. This feature is particularly useful for financial institutions that require tailored solutions for clearing and settlements while still benefiting from the security and efficiency of the L1X blockchain.

6.1.6. Compact Transaction Size and Quick Finality

L1X’s compact transaction size of 100 bytes, short block time of 500 milliseconds, and quick transaction finality in 1.5 s are advantageous for clearing and settlement processes. These attributes ensure that transactions are processed swiftly, reducing settlement times and associated risks.

6.2. Unlocking the Future of Clearing and Settlements with L1X Blockchain

L1X blockchain offers a range of capabilities that can be effectively employed for clearing and settlements in financial markets, revolutionizing the way transactions are processed and settled:
  • Efficient Cross-Border and Cross-Asset Settlements: L1X’s interoperability through X-Talk enables seamless transactions between different financial networks and asset types. This means that financial institutions can settle transactions involving various assets, such as equities, bonds, and cryptocurrencies, across borders with ease. The ability to interact, authenticate, and validate transactions across chains streamlines the settlement process, reducing both time and costs.
  • Reduced Counterparty Risk: The use of smart contracts on L1X ensures the automated and tamper-proof execution of agreements. This eliminates the need for intermediaries and reduces counterparty risk, as settlement instructions are executed automatically when predefined conditions are met. This is particularly beneficial in complex derivative markets where counterparty risk is a significant concern.
  • Enhanced Security and Trust: L1X’s Pentagon Framework, robust consensus mechanism (PoX), and compact transaction size contribute to a secure and trustworthy environment for clearing and settlements. Financial institutions can rely on L1X to maintain the integrity of their transactions, reducing the risk of fraud and ensuring trust among participants.
  • Scalability for High Transaction Volumes: Financial markets often experience spikes in transaction volumes, especially during periods of high trading activity. L1X’s scalability, with its initial capability of handling 100,000 transactions per second and the potential for substantial growth, ensures that clearing and settlement systems can efficiently process a large number of transactions even during peak times.
  • Customization for Institutional Needs: L1X’s ability to host subnets allows financial institutions, governments, and enterprises to create custom consensus mechanisms and privacy rules. This means that institutions can tailor the blockchain to meet their specific needs, whether this involvess implementing custom consensus rules or ensuring privacy for sensitive financial transactions.
  • Swift Transaction Finality: L1X’s quick transaction finality of 1.5 s ensures that transactions are settled promptly. This feature is particularly valuable in high-frequency trading environments where time is of the essence.
  • Cost Reduction: The elimination of intermediaries, coupled with the efficiency and automation of L1X, results in cost reductions for financial institutions. Lower operational costs and reduced settlement times contribute to significant savings in the long run.
  • Regulatory Compliance: L1X can be designed to comply with financial regulations in different jurisdictions. The transparency and immutability of blockchain transactions can assist in regulatory reporting and auditing processes, ensuring compliance with industry standards.
  • Incorporating L1X blockchain into clearing and settlement processes in financial markets has the potential to modernize and streamline operations, making them more efficient, secure, and cost-effective. While there are challenges and regulatory considerations to address, the benefits of using L1X blockchain for clearing and settlements are poised to transform the financial industry’s transaction-processing landscape.

6.3. Advantages of L1X Blockchain for Clearing and Settlements

This section delves into the advantages that L1X blockchain brings to the table when applied to clearing and settlement operations in the financial sector. This can be seen in Figure 4 below. These advantages encompass heightened efficiency, strengthened security, enhanced interoperability, seamless scalability, and the ability to tailor solutions to meet specific institutional needs, collectively redefining the landscape of financial transaction processing.
  • Efficiency: L1X simplifies and accelerates clearing and settlement processes, reducing the need for intermediaries and streamlining operations. This efficiency leads to faster transaction processing and reduces operational costs.
  • Security: The Pentagon Framework and PoX consensus mechanism provide robust security, ensuring the integrity of financial transactions. This is crucial for maintaining trust in clearing and settlement systems.
  • Interoperability: L1X’s X-Talk facilitates interoperability between different financial networks, allowing for seamless cross-border and cross-asset transactions. This reduces the complexities associated with settling transactions across multiple platforms.
  • Scalability: The scalability of L1X ensures that clearing and settlement systems can handle increasing transaction volumes without compromising performance or security.
  • Customization: The ability to create subnets with custom consensus mechanisms and privacy rules caters to the specific needs of different financial institutions, making L1X a versatile choice for clearing and settlements.

6.4. Challenges and Weaknesses

While L1X offers a compelling solution for clearing and settlements, it is essential to acknowledge potential challenges:
  • Adoption Hurdles: The adoption of blockchain technology in traditional financial institutions may face resistance due to regulatory concerns and the need for significant infrastructure upgrades.
  • Network Effects: The success of blockchain solutions like L1X relies on network effects. Widespread adoption is necessary to fully harness the benefits, and achieving this may take time.
  • Integration Complexity: Integrating L1X with existing financial systems can be complex, requiring careful planning and execution.

7. Conclusions: Transforming Financial Market Clearing and Settlement through Blockchain

The potential of blockchain technology to revolutionize financial market clearing and settlement processes is undeniable. As we conclude our exploration of this transformative force, it is evident that blockchain stands as a formidable candidate to reshape the very foundations of how financial assets are exchanged, cleared, and settled. Blockchain’s foundational principles, including decentralized ledgers, cryptographic security, and smart contracts, have already begun to pave the way for more efficient, transparent, and secure post-trade operations. The benefits are substantial: reduced counterparty risk, real-time settlement, cost savings, and enhanced transparency have emerged as promising outcomes. Case studies, such as the ASX CHESS Replacement Project and DTCC’s Project Ion, have demonstrated the real-world potential of blockchain in tackling the inefficiencies that have plagued traditional clearing and settlement systems for decades. These initiatives signify the industry’s readiness to embrace innovative solutions.
However, we must not overlook the challenges and considerations that accompany this transformation. Regulatory hurdles, interoperability issues, and the need for secure identity management all pose significant barriers. The intersection of blockchain and traditional financial regulations necessitates a careful balancing act between innovation and compliance. Moreover, the evolving landscape of central bank digital currencies (CBDCs), decentralized finance (DeFi), and quantum computing underscores the dynamism of this field. The integration of CBDCs, in particular, promises to redefine cross-border settlements and further drive blockchain adoption. In the face of these challenges and opportunities, the financial industry is undergoing a profound transformation. The collaborative efforts of financial institutions, technology providers, and regulatory bodies have set the stage for a new era of clearing and settlement. Standardization initiatives, industry consortia, and regulatory sandboxes exemplify the collective commitment to driving this technology forward.
Layer One X (L1X) presents a compelling case for its use in clearing and settlements within the financial sector. Its interoperability, scalability, security features, consensus mechanism, and customization options position it as a powerful tool for transforming the way financial transactions are cleared and settled. While there are challenges to overcome, the advantages offered by L1X make it a promising solution that can enhance the efficiency, security, and transparency of clearing and settlement processes in the financial industry. As blockchain technology continues to mature, L1X stands at the forefront of innovation, poised to reshape the financial landscape.
In conclusion, while the path to widespread blockchain adoption in financial market clearing and settlement may be paved with complexities, it is also illuminated by the promise of a more efficient, secure, and inclusive financial ecosystem. Blockchain has the potential to enhance market integrity, reduce risks, and democratize access to financial services. As we continue this journey of exploration and innovation, it is imperative that stakeholders across the industry remain vigilant, adaptable, and collaborative to realize the full potential of blockchain in financial market clearing and settlement. The road ahead may be challenging, but the destination promises to be transformative.

Author Contributions

Conceptualization, N.A. and P.W.; methodology, N.A.; validation, P.W. and K.C.; formal analysis, N.A. and N.K.; investigation, P.W. and K.C.; resources, P.W.; data curation, N.A.; writing—original draft preparation, N.A. and N.K.; writing—review and editing, N.A., N.K., P.W. and K.C.; visualization, N.A. and N.K.; supervision, P.W. and K.C. All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Data Availability Statement

Research data supporting reported results can be found in Appendix A.

Conflicts of Interest

The authors declare no conflict of interest.

Appendix A. List of 59 Articles—Related to Blockchain Application to Financial Market Clearing and Settlement Systems

AuthorArticle NameJournal
(Ableitner et al. 2020)User behavior in a real-world peer-to-peer electricity marketApplied Energy
(Afzal et al. 2022)Role of blockchain technology in transactive energy market: A reviewSustainable Energy Technologies and Assessments
(Alexander et al. 2023)Hedging with automatic liquidation and leverage selection on bitcoin futuresEuropean Journal of Operational Research
(Ali et al. 2020)The state of play of blockchain technology in the financial services sector: A systematic literature reviewInternational Journal of Information Management
(Allen et al. 2022)Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in ChinaJournal of International Money and Finance
(Amini et al. 2023)Decentralized payment clearing using blockchain and optimal biddingEuropean Journal of Operational Research
(Andoni et al. 2019)Blockchain technology in the energy sector: A systematic review of challenges and opportunitiesRenewable and Sustainable Energy Reviews
(Antal et al. 2021)Blockchain based decentralized local energy flexibility marketEnergy Reports
(Ante 2021)Smart contracts on the blockchain A bibliometric analysis and reviewTelematics and Informatics
(Brauneis et al. 2022)Bitcoin unchained: Determinants of cryptocurrency exchange liquidityJournal of Empirical Finance
(Bukar et al. 2023)Peer-to-peer electricity trading: A systematic review on current developments and perspectivesRenewable Energy Focus
(Carapella and Monnet 2020)Dealers’ insurance, market structure, and liquidityJournal of Financial Economics
(Chen et al. 2021)A trusted energy trading framework by marrying blockchain and optimizationAdvances in Applied Energy
(Choobineh et al. 2023)Game-theoretic peer-to-peer solar energy trading on blockchain-based transaction infrastructuree-Prime—Advances in Electrical Engineering, Electronics and Energy
(Duchenne 2018)Chapter 22—Blockchain and Smart Contracts: Complementing Climate Finance, Legislative Frameworks, and Renewable Energy ProjectsTransforming Climate Finance and Green Investment with Blockchains
(Esmat et al. 2021)A novel decentralized platform for peer-to-peer energy trading market with blockchain technologyApplied Energy
(Foti and Vavalis 2019)Blockchain based uniform price double auctions for energy marketsApplied Energy
(Freni et al. 2022)Tokenomics and blockchain tokens: A design-oriented morphological frameworkBlockchain: Research and Applications
(Giudici et al. 2022)Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spilloversFinance Research Letters
(Gowda and Chakravorty 2021)Comparative study on cryptocurrency transaction and banking transactionGlobal Transitions Proceedings
(Gu et al. 2022)On-chain analysis-based detection of abnormal transaction amount on cryptocurrency exchangesPhysica A: Statistical Mechanics and its Applications
(Han et al. 2020)Smart contract architecture for decentralized energy trading and management based on blockchainsEnergy
(Hewa et al. 2021)Survey on blockchain based smart contracts: Applications, opportunities and challengesJournal of Network and Computer Applications
(Hughes et al. 2019)Blockchain research, practice and policy: Applications, benefits, limitations, emerging research themes and research agendaInternational Journal of Information Management
(Javaid et al. 2022)A review of Blockchain Technology applications for financial servicesBench Council Transactions on Benchmarks
(Bevin and Verma 2023)Decentralized local electricity market model using Automated Market MakerApplied Energy
(Kabra et al. 2020)MudraChain: Blockchain-based framework for automated cheque clearance in financial institutionsFuture Generation Computer Systems
(Kim et al. 2023)Pricing mechanisms for peer-to-peer energy trading: Towards an integrated understanding of energy and network service pricing mechanismsRenewable and Sustainable Energy Reviews
(Kirli et al. 2022)Smart contracts in energy systems: A systematic review of fundamental approaches and implementationsRenewable and Sustainable Energy Reviews
(Li et al. 2023)The optimal asset trading settlement based on Proof-of-Stake blockchainsDecision Support Systems
(Li et al. 2024)On Stablecoin: Ecosystem, architecture, mechanism and applicability as payment methodComputer Standards & Interfaces
(Li and Ma 2020)Peer-to-peer electricity trading in grid-connected residential communities with household distributed photovoltaicApplied Energy
(Loader 2020a)Chapter 1—The structure of clearing and settlementClearing, Settlement and Custody (Third Edition)
(Loader 2020b)Chapter 2—The role of the clearing house, trade repositories and central securities depositoriesClearing, Settlement and Custody (Third Edition)
(Loader 2020c)Chapter 10—Developments in clearing settlement and custody SWIFT, CLS bank, T2S, the development of distributed ledger technology (DLT), BrexitClearing, Settlement and Custody (Third Edition)
(Marke and Sylvester 2018)Chapter 4—Decoding the Current Global Climate Finance ArchitectureTransforming Climate Finance and Green Investment with Blockchains
(Oprea and Bâra 2021)Devising a trading mechanism with a joint price adjustment for local electricity markets using blockchain. Insights for policy makersEnergy Policy
(Panetta et al. 2023)The development of digital payments Past, present, and future from the literatureResearch in International Business and Finance
(Patel et al. 2022)Blockchain in banking and finance: A bibliometric reviewResearch in International Business and Finance
(Renduchintala et al. 2022)A Survey of Blockchain Applications in the FinTech SectorJournal of Open Innovation: Technology
(Singh and Chakraborty 2023)Chapter 21—Demystifying blockchain adoption in financial sector critical analysisDistributed Computing to Blockchain
(Son and Jang 2023)Economics of blockchain-based securities settlementResearch in International Business and Finance
(Spilker and Nugent 2022)Voluntary carbon market derivatives: Growth, innovation & usageBorsa Istanbul Review
(Strepparava et al. 2022)Deployment and analysis of a blockchain-based local energy marketEnergy Reports
(Sun et al. 2021)Energy sharing platform based on call auction method with the maximum transaction volumeEnergy
(Teall 2023)Chapter 2—Securities MarketsFinancial Trading and Investing (Third Edition)
(Tsaousoglou et al. 2022)Market Mechanisms for Local Electricity Markets: A review of models, solution concepts and algorithmic techniquesRenewable and Sustainable Energy Reviews
(Ullah et al. 2022)Hybridizing cost saving with trust for blockchain technology adoption by financial institutionsTelematics and Informatics Reports
(Walch 2018)Chapter 11—Open-Source Operational Risk: Should Public Blockchains Serve as Financial Market Infrastructures?Handbook of Blockchain, Digital Finance, and Inclusion
(Wang et al. 2019)Is bitcoin a safe haven or a hedging asset? Evidence from ChinaJournal of Management Science and Engineering
(Wang et al. 2022)A model for CBDC audits based on blockchain technology: Learning from the DCEPResearch in International Business and Finance
(Xia et al. 2023)Reviewing the peer-to-peer transactive energy market: Trading environment, optimization methodology, and relevant resourcesJournal of Cleaner Production
(Xiao et al. 2022)Blockchain and Federated Learning Based Bidding Applications in Power MarketsProcedia Computer Science
(Zhang and Huang 2022)Blockchain and central bank digital currencyICT Express
(Zhang et al. 2021)Supply chain finance based on smart contractProcedia Computer Science
(Zhang et al. 2023)Smart contract design and process optimization of carbon trading based on blockchain: The case of ChinaJournal of Cleaner Production
(Zhou and Kalev 2019)Algorithmic and high frequency trading in Asia-Pacific, now and the futurePacific-Basin Finance Journal
(Zhou and Lund 2023)Peer-to-peer energy sharing and trading of renewable energy in smart communities trading pricing models, decision-making and agent-based collaborationRenewable Energy
(Zook and Grote 2022)Blockchain financial geographies: Disrupting space, agency and scaleGeoforum

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Jrfm 16 00452 g001
Figure 1. Three-step process for identifying relevant literature using the PRISMA process.
Figure 1. Three-step process for identifying relevant literature using the PRISMA process.
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Figure 2. Thematic review of the 59 articles based on specific focus areas.
Figure 2. Thematic review of the 59 articles based on specific focus areas.
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Figure 3. Graph of the number of articles, journal name, and year of publication.
Figure 3. Graph of the number of articles, journal name, and year of publication.
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Figure 4. Layer One X: features, advantages and challenges.
Figure 4. Layer One X: features, advantages and challenges.
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MDPI and ACS Style

Agarwal, N.; Wongthongtham, P.; Khairwal, N.; Coutinho, K. Blockchain Application to Financial Market Clearing and Settlement Systems. J. Risk Financial Manag. 2023, 16, 452. https://doi.org/10.3390/jrfm16100452

AMA Style

Agarwal N, Wongthongtham P, Khairwal N, Coutinho K. Blockchain Application to Financial Market Clearing and Settlement Systems. Journal of Risk and Financial Management. 2023; 16(10):452. https://doi.org/10.3390/jrfm16100452

Chicago/Turabian Style

Agarwal, Nipun, Pornpit Wongthongtham, Neerajkumari Khairwal, and Kevin Coutinho. 2023. "Blockchain Application to Financial Market Clearing and Settlement Systems" Journal of Risk and Financial Management 16, no. 10: 452. https://doi.org/10.3390/jrfm16100452

APA Style

Agarwal, N., Wongthongtham, P., Khairwal, N., & Coutinho, K. (2023). Blockchain Application to Financial Market Clearing and Settlement Systems. Journal of Risk and Financial Management, 16(10), 452. https://doi.org/10.3390/jrfm16100452

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