A new report co-authored by the Global Financial Markets Association (GFMA), Boston Consulting Group (BCG), Clifford Chance, and Cravath, Swaine & Moore LLP, underscores the transformative potential of Distributed Ledger Technology (DLT) for capital markets. The report encourages market participants to actively mould the future application of DLT and urges policymakers to provide more precise regulatory direction.
Entitled “The Impact of Distributed Ledger Technology in Global Capital Markets,” the report explores the opportunities and challenges of DLT and DLT-based securities, and analyses the fit of existing legal, regulatory, and risk management frameworks. To exemplify DLT’s potential, it delves into three emerging use cases: collateral management, asset tokenisation, and sovereign and quasi-sovereign bonds. The report identifies cost-saving and operational efficiency benefits, such as a potential reduction of $20 billion annually in global clearing and settlement costs. Moreover, it indicates possible innovation-led growth, broader market access, and new liquidity pools, for instance, a $16 trillion global market for tokenised illiquid assets by 2030.
However, the report recognises that DLT has not been widely adopted in securities markets, with most DLT-based issuances being experimental. The GFMA proposes five strategies to address the adoption barriers and further DLT-based capital markets’ development: harmonising global regulatory and legal frameworks, encouraging interoperability, accelerating adoption, collaborating on DLT advancement, and continuing the development of DLT-based payment solutions.
“Despite the buzz and excitement surrounding DLT, this report reveals a stark reality – widespread adoption in the capital markets industry is still a distant dream,” comments Léandre Moreno, Digital Assets Product Manager at Murex, a trading and risk solutions vendor. “How do we change this? Learnings from the FTX saga have definitely forced forward the evolution of the digital assets ecosystem. Having regulatory clarity and legal certainty is a must for institutions. Now, we need global industry led standardization initiatives to scale and use all the potential of DLTs to very efficiently meet cybersecurity requirements and ease regulatory compliance. As such, a digital standard should now be a prerequisite to increase transparency, efficiency and remove settlement risk.”
He adds: “Further, this helps to promote interoperability by ensuring that data and transactions can flow smoothly between different networks. This will be key for the implementation of security token and all the use cases related to securities (primary market, secondary market, lending, collateral, custody, clearing, etc.). But the creation of wholesale CBDBC and/or Tokenized commercial bank money on top of this standardized ecosystem will be compulsory to fully benefit the potential of smart contract implemented in DLT’s. Only then, we will begin to realize the ground-breaking potential of DLT and its impact on market infrastructure as we know it.”
The GFMA has developed a methodology for classifying digital assets, promoting legal clarity and confidence for asset managers, investors, and issuers, and identifying the different types of risk associated with digital assets. This methodology aims to mitigate reputational risks arising from confusion around different DLT use cases.
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