Key takeaways:
As digital assets and blockchain transform how money and assets move across global markets, their success will depend on building trust through regulation, governance, and liquidity.
- Trust comes from regulation and governance, not blockchain architecture alone.
- Blockchain’s value may grow as multi-asset settlement could reduce complexity and improve efficiency across markets.
- Interoperability and liquidity are essential to prevent fragmentation and support scale.
In the realm of finance, settlement is easy to overlook. Most people never think about it, even though it sits behind hundreds of trillions of dollars in transactions every day.
That's because when settlement works, nothing happens. It is quite simply the final step in a financial transaction in which cash, securities, or other assets officially change ownership between two parties. It's only when something goes wrong that the importance of settlement — and ensuring it happens in a way all parties can trust — becomes clear.
The introduction of digital assets such as tokenized reserves, tokenized deposits and stablecoins may change some of the processes we’ve relied on for decades. If we do it right, clients will have more choice. They’ll be able to rely on traditional forms of money and settle transactions through traditional methods or, if they prefer, digital assets via distributed ledger technology—a blockchain.
Choice is often framed as a positive. But choice can also introduce complexity and regularly requires trade-offs. We owe it to ourselves to think carefully about these trade-offs because the increased availability of digital assets, and reliance on blockchain technology, represents a foundational change that will reverberate throughout the financial system.
Digital assets and the mainstream adoption of blockchain technology could bring efficiency gains in the global payment arena, but they could also lead to challenges like market fragmentation and liquidity constraints. The choices we make and the complexities we accept will have real consequences.
Building trust with regulation
Innovation is merely a specific form of change, and change is constant. Our regulatory system adapts. Well-designed regulation forms the basis for legal certainty, common standards and clear governance — all of which are enablers for responsible innovation. Without it, innovation doesn’t have the trust to spread.
Blockchain, widely regarded as a transformative innovation in digital finance, offers a powerful illustration of the role regulation plays in establishing trust and enabling adoption. Blockchain first came to prominence with promises to allow buyers and sellers to bypass their traditional intermediaries — banks and brokerages. Trust would be provided by architecture and technology. It hasn’t worked that way. The qualities that initially differentiated blockchain from traditional financial infrastructures also demonstrated the limits of technology-driven trust in the absence of clear governance and regulatory frameworks.
One might counter that blockchain does not have an “Achilles heel” (in the sense of a “fatal flaw”) since it can be a preferred solution — or a component of a preferred solution — for many financial (and other) applications. Now, many of those who are leading much of the experimentation and implementation of blockchain and digital asset solutions are the very intermediaries who were intended to be bypassed. A technology that was supposed to belong to the upstarts will find success with the very intermediaries it was supposed to replace. Why? Because many of these are overseen and regulated, and that framework has substantially contributed to the creation and preservation of trust.
Complexity that goes beyond technology
While digital assets and the underlying blockchain have been around for a while, they have remained relatively niche. However, it is increasingly clear the world is moving in the direction of multi-asset and multi-payment rail solutions, which may lead to the coexistence of different settlement options. Indeed, more than 80 countries currently operate real-time domestic instant payment systems, and many are starting to connect internationally.1 Now more than ever, leaders need to be well informed in order to avoid risk and make the right decisions.
Different asset types may require different forms of payment rails. Currently, foreign exchange (FX), for example, can be settled via a process called payment vs. payment (PvP). PvP ensures that the final transfer of one currency occurs only if the final transfer of the other currency also takes place. If the trade fails on one side, it fails on the other.
From today’s perspective, settling an FX trade on a blockchain does not necessarily offer an obvious advantage. PvP mechanisms already address the key settlement risk (also known as Herstatt risk, after the failure of Bankhaus Herstatt in 1974) in FX by ensuring that both sides of the trade are completed simultaneously. “Atomic settlement”, often presented as a novelty in the blockchain space, is precisely this: settling simultaneously on an all-or-nothing basis.
However, the benefits of blockchain technology may become more obvious when FX transactions form part of a broader, multi-asset transaction. A good example is an equities transaction, where the transfer of securities must be synchronized with a related fiat currency payment. Managing this via a shared ledger has the potential to reduce settlement complexity, and lessen the need to reconcile across multiple systems. So even if these new forms of settlement do not have an immediate impact on FX, they could become more relevant as interconnectivity increases within financial markets.
Well-designed regulation forms the basis for legal certainty, common standards and clear governance — all of which are enablers for responsible innovation. Without it, innovation doesn’t have the trust to spread.
The building blocks needed to scale
More is sometimes better, but not always: each new solution may for example require its own pool of liquidity. The more settlement options we have to choose from, the less liquidity is available for each. A lack of liquidity can make settlement more expensive, slow it down, or, in extreme cases, make it impossible. Therefore, interoperability and liquidity optimization are key to achieving scale.
Even with multiple settlement options in place, each day, more than $1.4 trillion of foreign exchange transactions are settled gross and not via PvP,2 without any settlement risk mitigation in place. These trades are fully exposed to settlement risk.
There are several reasons for this, including the fact that existing PvP solutions do not cover all currencies and currency pairs. For example, the USD/CNH currency pair is the third most traded in the world but is not currently settled using PvP on a global scale. CLS is working on a solution for CNH which relies on traditional payment rails. A blockchain-based system has the potential to extend PvP to markets not covered by existing infrastructure solutions, but parties, systems and currencies would still need to be connected. Forming these connections is underpinned by factors such as geopolitical considerations. As such, the problems faced in the global FX market are not solely technological in nature.
Like other forms of settlement structures, blockchain-based systems would also require agreement on governance, legal arrangements (e.g., with respect to finality), settlement processes and dispute/failure resolution. In the FX market, this requires cooperation between market participants, payment systems and central banks or other public sector authorities.
Developing and adopting new settlement services will take time. This is no surprise given the need to fully understand the underlying mechanisms, risks and potential consequences of trade-offs that may need to be made. Coupled with the fact that appropriate standards and regulatory frameworks are also fundamental if these new services are to be adopted at scale: a quick fix is unlikely. But if experience has demonstrated anything, it’s that the stronger the foundations, the more robust, effective and suitable for widespread use the resulting infrastructure is likely to be.
For leaders, the answer is not to wait on the sidelines, but neither is it to assume that every new settlement method will be better simply because it is new. Digital assets and blockchain-based settlement models deserve active investigation, particularly where they may support broader multi-asset transactions, improve efficiency across systems or address genuine market needs.
But experimentation should be targeted, risk-based and grounded in the realities of today’s markets. In FX specifically, blockchain does not currently offer an obvious solution to the core challenge of settlement risk. PvP mechanisms already provide effective settlement risk mitigation where they are available.
The harder challenges are not purely technological. They include extending coverage to more currencies and currency pairs alongside preserving liquidity. We should therefore approach change as a strategic evolution, not a quick fix: understand the trade-offs, experiment where there is a clear use case, and build on foundations that support trust, resilience and scale. The goal should be to expand choice without introducing greater fragmentation, liquidity constraints or risk.
- https://routefusion.com/blog/real-time-payments-by-country
- BIS Triennial Survey 2025
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