For post-trade services, distributed ledger technology (DLT) is more of a promise than a reality. There are some ideas about how the technology can change the picture at the transaction and post-trade level, but so far no one has demonstrated it is a viable solution to cover the complete securities processing lifecycle. DLT is not a magic wand. Many trials are under way, including a joint venture of French banks that is investigating DLT for post-trade services. DLT is complex from a technical point of view, but there are other issues as well, including how systems can be regulated and how they can achieve critical mass. Any DLT initiative for post-trade processes must have the support of financial regulators, or it will struggle.
DLT has the potential to significantly change the roles of key actors in the securities markets. Some actors, such as custodians and CSDs, may no longer be required as those issuing equities and those buying them can deal directly with each other. The securities markets could evolve into an industry that has a very small number of actors compared with today – possibly even just issuers and investors. Nothing is yet certain, but it is interesting that some actors – who could be potentially big losers in a DLT system – are willing to invest in DLT.
There are already DLT platforms that are dedicated to crowd funding and lending that bring together borrowers and lenders. The technology provides the possibility of removing intermediaries from processes. With fewer intermediaries, there is less cost.
Most players in the securities industry are investigating DLT and its potential. For example, reconciliations are a major issue in the securities markets and firms spend a lot of time and money reconciling transactions. With DLT, buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done. With DLT, all of the complex systems and processes to transfer cash and equities from one account to another are not required. Everything can be embedded into the blockchain. From an operational viewpoint, the impact of DLT would be immediate and quite positive.
From a technical viewpoint, there are many proof of concept projects under way. For example, it is possible to duplicate asset servicing functionality, such as corporate actions management, on the blockchain. Little by little, these projects are proving that we can transfer existing post-trade processes to the blockchain. But this raises significant questions for the actors in the post-trade world as their role may change dramatically. For example, what will the value-add be within DLT services,
DLT has the potential to dramatically change post-trade processes, such as the management of risk and the notion of delivery versus payment (DVP). With blockchain, everything will be in place on the blockchain at the time of the transaction. Institutions will no longer have to maintain their own databases – in the future with DLT, there will be only one database for all participants in the transaction.