BOJ and ECB Report on Phase 4 of Research on DLT Under Project Stella

Over the past years, a number of solutions have been developed to cater to the privacy and confidentiality aspects that arise as a result of the sharing of transaction information in distributed ledgers. These solutions focus, for example, on limiting access to information by unauthorized parties and are generally known as PETs. The use of PETs may pose challenges, however, when third parties need to view and interpret the transaction for auditing purposes. To ensure accountability, the level of auditability aimed for in payment and settlement systems based on distributed ledger technology should be similar to that in centralized systems. This is applicable regardless of the different types of settlement assets, including stablecoins, central bank digital currency, and others.

Against this background, Stella phase 4 explores—through conceptual studies and practical experimentation—how confidentiality and auditability could be balanced in a distributed ledger environment. It assesses the way in which PETs would ensure confidentiality as well as the arrangements that accommodate effective auditing for transactions in a financial market infrastructure based on distributed ledger technology. Stella phase 4 proposes that the auditability of transactions in a financial market infrastructure based on distributed technology using PETs can be assessed from the key perspectives of accessibility to necessary information, reliability of the obtained information, and efficiency of the auditing process. Additionally, Stella phase 4 raises points for further consideration when expanding the discussion on balancing confidentiality and the auditability of transactions for practical application:

• It notes that the reliance on a trusted source could pose single point of failure risks for the network.
• When multiple PETs are used in combination, there could be a trade-off between enhancing confidentiality and effective auditability.
• When the model accommodates multiple payment and settlement systems as well as multi-tiered payment systems, it would be necessary to coordinate different standards and processes between systems.
• The inclusion of end-users may increase the complexity of managing the confidentiality of end-user information and necessitate the creation of appropriate standards to determine the transactions to be audited.

Keywords: Asia Pacific, Europe, Japan, Banking, Insurance, Securities, PMI, FMI, Project Stella, Fintech, Blockchain, Distributed Ledger Technology, EU