DLT accounting – what is it and what can it change in our daily lives?

Distributed ledger technology (DLT) is used to record ownership of assets. Today, any transaction by a commercial bank that results in the transfer of ownership of, for example, money or financial assets, must go through a centralized system (operators of such systems are often central banks). Commercial banks maintain a list of the operations they handle in a local database, which is updated after the transaction is completed in the central system.
A distributed registry is a transaction database that is not located in one place, but is spread among many networked computers. Usually, all members of this network can read the stored information and, depending on their privileges, add new information.

The most common type of DLT technology is called blockchain, literally “block chain.” Transactions are grouped into blocks, which are then linked together in chronological order to form a chain. The entire chain is protected by complex mathematical algorithms that guarantee the integrity and security of the data. The chain is a complete record of all recorded transactions.

Legal regulation of DLT accounts

Regulations on DLT accounts can be found in both Polish legislation and European acts. On domestic grounds, the most relevant act is the Act on Trading in Financial Instruments of July 29, 2005, which regulates issues such as, among others, registration of securities that are financial instruments supported by DLT, creation and transfer of rights from securities that are financial instruments supported by DLT, DLT records.

The Polish regulations are the result of the implementation of the Regulation of the European Parliament and Council (EU) 2022/858 of May 30, 2022 on a pilot system for market infrastructures based on distributed ledger technology.

The main features of the DLT account:

1. Decentralization – data is not stored in a single location, but is dispersed across multiple network nodes,
2. Immutability – transactions stored in the registry are difficult to change or delete, which ensures their integrity,
3. Transparency – any network participant can view the transaction history, which increases the transparency of the system,
4. Automation – through the use of smart contracts, DLT accounts can automate many processes, such as financial settlements and contract enforcement.

Examples of the use of DLT accounts:

1. Cryptocurrencies – Addresses on networks such as Bitcoin or Ethereum are forms of DLT accounts that enable the storage and transfer of digital assets,
2. CBDC (Central Bank Digital Currency) – central banks are considering using DLT to create digital versions of national currencies,
3. Tokenization – representing physical assets (e.g., real estate) in the form of tokens stored in DLT accounts.

Like any new technology, DLT brings with it both many opportunities and benefits but can also cause difficulties and present us with challenges in the form of responding to the risks flowing from the technology.

Benefits of using DLT technology

1. Decentralization – data is stored in a distributed registry, which eliminates the risk of a single point of failure (single point of failure) and reduces dependence on central institutions,
2. Security – data is cryptographically secured, making it resistant to unauthorized changes, tampering or cyber-attacks,
3. Transparency – all transactions are visible to network participants, which increases transparency and reduces the risk of fraud,
4. Immutability of data – once a transaction is recorded in the registry, it is virtually impossible to change or delete it, ensuring the integrity of records,
5. Efficiency and savings – automation of processes through smart contracts reduces the need for intermediaries, which lowers costs and reduces transaction processing time,
6. Global reach – the technology works regardless of national borders and can handle global transactions in real time,
7. Flexibility of applications – DLT can be used in a variety of sectors, from finance to logistics to healthcare and rights management.

Downsides of using DLT technology

1. High implementation costs – DLT deployment can require significant investment, both in technical infrastructure and staff training, for those using the technology,
2. Scalability – popular DLT networks, such as blockchain, may have limited transaction throughput, making their performance decrease as the number of users increases (e.g., Bitcoin’s scaling problem),
3. Energy consumption – consensus algorithms such as Proof of Work (PoW) can be very energy intensive (the Bitcoin network is an example),
4. Regulatory complexity – many countries lack clear regulations on the use of DLT, which can lead to regulatory uncertainty and risk,
5. Lack of standards – there are many different DLT implementations, which can lead to interoperability problems between systems and complicate their integration,
6. Potential centralization in practice – in some cases, despite the decentralized structure, control over key elements of the system (e.g., nodes) may be concentrated in the hands of a small number of participants,
7. Data privacy – although data in DLT is transparent, sensitive information may be accessible to a larger number of people, which may pose challenges in the context of data protection (e.g., RODO).

Summary

The DLT account is a cutting-edge tool that has the potential to revolutionize many areas, particularly finance, by offering a more transparent, secure and efficient way to manage assets and transactions. However, before it is fully implemented, the costs, technical and regulatory challenges must be carefully analyzed to minimize risks and ensure effective use of this innovative technology.