After months of trials the Bank of England remains no clearer about the applicability of distributed ledger technology in wholesale payments and settlement, uncovering critical trade-offs in governance, resilience and scalability, according to Finextra.
The DLT Innovation Challenge was a joint initiative between the Bank of England (the Bank) and the BIS Innovation Hub London Centre. Its objective was to explore how distributed ledger technology could be applied to wholesale payments and settlement. The challenge was focused on building understanding, nothing in this report should be interpreted as indicating a policy position or commitment by the Bank or the BIS.
The Challenge provided practical insights on the design of DLT platforms and how different design choices affect their usefulness for financial market participants as well as important public policy priorities. This contributes to policy work around use of DLT in the private sector to tokenise money and assets, as well as to the Bank’s work on how to support settlement of tokenised wholesale transactions in central bank money. To examine this, the Challenge brought together a diverse set of participants, including financial institutions, technology firms, and academic experts.
Participants explored DLT solutions across four themes: (i) settlement finality and security; (ii) scalability; (iii) network and asset control; and (iv) interoperability with other DLT platforms and with non‑DLT systems, including real‑time gross settlement (RTGS). Across these themes, participants proposed a wide range of technical design choices, including permissioned and permissionless architectures, different consensus mechanisms, layered execution models, and alternative interoperability arrangements.
Settlement finality. Settlement finality underpins confidence that completed transactions are irrevocable and is a core expectation for systemically important payment systems and other types of financial market infrastructure. The Challenge demonstrated that a range of technical approaches can improve the speed of settlement finality on DLTs, including constrained validator sets, alternative consensus designs, and layered execution models. However, each introduces trade‑offs between determinism, resilience and decentralisation. No single model delivers fast, deterministic finality without shifting risk or trust assumptions, highlighting the importance of carefully assessing how different designs align with the standards expected of wholesale payment and settlement systems.
Scalability. Scalability of payment systems can have implications for operational resilience and financial stability. Participants demonstrated multiple on‑chain and off‑chain approaches to scaling DLT‑based systems, including Layer 1 optimisation, horizontal scaling, and Layer 2 execution. These approaches can increase throughput and reduce latency but often introduce additional complexity and have implications for settlement finality, governance and operational resilience. Therefore, scalability choices cannot be considered in isolation from control and resilience requirements.
Scalability, or ability to process large transaction volumes with low latency, is essential for real-world adoption of electronic payment systems. It can also have implications for operational resilience and financial stability, particularly where payment systems are systemically important.
Scalability emerged as a central theme throughout the Challenge, reflecting a common constraint for DLT based solutions. This challenge is often described through the ‘blockchain trilemma’ which highlights the inherent trade-offs between scalability, decentralisation, and security. The ‘blockchain trilemma’ posits that it is difficult to optimise scalability, security, and decentralisation simultaneously.
Network and asset control. Effective network and asset control enables security, resilience, and compliance objectives, depending on system design and governance. The Challenge highlighted that effective network and asset control can be implemented at different layers of the DLT stack, through combinations of on‑chain permissions, off‑chain governance arrangements, and middleware solutions. Stronger control and compliance capabilities were typically associated with more permissioned or layered architectures. More open network designs relied on additional governance and trust arrangements to achieve asset controls, either through technical means (such as smart contracts) or governance through foundations or decentralised organisations.
Interoperability between DLT and non-DLT networks. Interoperability is important to enable innovation, avoid fragmentation of liquidity and ensure robust functioning of the financial system. Participants presented a range of interoperability models enabling interaction between DLT platforms, and between DLT and non‑DLT systems, including RTGS. These included native protocol features, bridges, or orchestration layers. Interoperability solutions involve trade‑offs between atomicity, flexibility and security, with interoperability often shifting, rather than removing, trust and operational dependencies across systems.
„Overall, the Challenge highlighted that, while technical progress has been made, the use of DLT for wholesale settlement involves significant design trade‑offs. Choices that improve speed or scalability may introduce new dependencies or resilience considerations; approaches that enhance decentralisation may complicate governance or control; and interoperability solutions can shift, rather than eliminate, trust assumptions. This leads to further questions around how we implement governance of networks and needing off-chain components to enable this for permissionless ledgers; as well as a need to further understand optimal interoperability either through native integration or use of third parties.” – according to the Bank of England.
More details: DLT Innovation Challenge 2025: Final Report
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