DLT-based enhancement of cross-border payment efficiency - a legal and regulatory perspective

BIS Working Papers  |  No 1015  | 
20 May 2022



Traditionally cross-border payments have relied on a mutually trusted central entity. Distributed ledgers, blockchain and smart contracts (together dubbed "distributed ledger technologies" or DLT) could provide an alternative to that approach. However, different DLT applications in the cross-border payments context come with legal challenges. Hence, it is necessary to analyse the extent to what financial law and regulation is fit to deal with DLT-based payments.


It is widely acknowledged that conflicting laws and regulations in a cross-border context could create an impediment to smooth cross-border payment flows. However, research so far has focused on technical concepts and lacked legal details. In turn, there is a gap in legal research as to what in detail creates said barriers. Our research fills this gap. We outline several concepts for DLT-based payments and then go on to inquire to what extent financial law and regulation is fit to deal with DLT-based payments. This  analysis of the legal challenges can inform authorities when adapting their laws and regulations, and thus reduce legal risk for DLT-based cross-border payments.


We find that financial law traditionally assumes that functions are concentrated in a single entity. Hence, the distribution of functions in DLT comes with the need for additional agreements, ongoing coordination across, and governance arrangements among each participant. Further, in a cross-border context, multiple regulators and courts of various countries will be involved. All of these must decide whether for compliance with the law and regulations they look at DLT as a whole ('ledger perspective') or each individual DLT participant ('node perspective'). On that basis we analyse the extent to which the ledger or the node perspective should prevail, resulting in policy recommendations for regulators.


Financial law and regulation have, to date, assumed that regulated activities and functions are concentrated in a single legal entity responsible and accountable for operations and compliance. Even with regard to financial market infrastructure where the regulatory perspective acknowledges the need for interoperability of many entities as a system, each entity is subject to its own rules and regulations, and can thus meet its own compliance requirements independent of other system participants. The entity-focused regulatory paradigm is under pressure in the world of DLT-based payment arrangements where some ledgers, and thus the performance of the services as such, are distributed. DLT arrangements could provide an alternative to the traditional reliance on a mutually trusted central entity to transfer funds and enable the creation of new foundational infrastructures by distributing technical functions or linking existing systems. As such, we identify and outline concepts for use cases where DLT is potentially improving the efficiency of cross-border payments, namely a Best Execution DLT, a DLT application for a Network of Central Banks, a DLT as an AML/KYC utility, as well as DLT arrangements for an Identity Platform, a Small Payments Platform and, finally, an Interoperability Platform connecting multiple closed-loop and proprietary banking systems.

JEL classification: G20, G21, G28, E42, E58, K23, K24, O16.

Keywords: distributed ledgers, blockchain, payments, central banks, cross-border payments, law.