DLT report under the microscope: What’s the lesson, what is the takeaway?

The Global Financial Markets Association (GFMA) and other partners issued a mammoth report on the impact of distributed ledger technology in global capital markets with lots of headline numbers to highlight the savings and benefits, but the report ultimately shows just how far there is to go on widespread adoption.

The adage of distributed ledger technology (DLT) being a ‘hammer looking for a nail’ remains a sentiment which is up for debate after a decade filled with ample talk but no action. 

Low-hanging areas of fruit such as settlement, corporate actions and reconciliation have always been labelled as prime for DLT intervention, however most of the progress has been confined to pilots, proof of concepts and work from fintechs and start-ups unhampered by legacy technology. 

This week however, a report from a range of associations and consultants titled The Impact of Distributed Ledger Technology in Global Capital Markets appears to have ruffled some feathers and caught widespread media attention – most notably because it has thrown around some big numbers with regards to the post-trade sector. 

The top end the report suggests the opportunity could range well beyond $100+ billion annually in freed financial resources that could be redeployed to generate incremental returns – this was in the context of there being an estimated $19 trillion worth of addressable global collateral outstanding across repurchase agreements (repos), OTC derivatives, and securities lending. 

Elsewhere the report estimates $15-20 billion in annual global infrastructure operational cost savings, “driven by smart contract-driven process automation in areas such as settlement and corporate action administration”. 

The report is 188-pages long and full of these numbers – there are even a few “trillions” thrown in – but here are some of the most interesting takeaways from the report from a securities services angle: 

Green across the board for securities services: In a helpfully coloured chart of the impact of DLT-based securities on workflow efficiency, financials and value creation, and risk mitigation across the securities lifecycle, almost everything securities services-related was deemed to be green, and have a high degree of positive impact from DLT. This include clearing and settlement, custody and asset servicing. 

The explanations were given as follows: “DLT-based clearing and settlement could emerge as a complementary channel alongside infrastructure in traditional markets, with automated processes & risk mitigation.”  

For custody: “DLT offers technical capabilities that could help establish ‘golden-source’ records and workflow automation in post-trade processes, mitigating operational risk.” 

And lastly, “DLT could automate asset servicing and lifecycle management workflows for corporate actions, tax withholding, and regulatory reporting that mitigates operational and compliance risk.” 

Timescale and action points: The report highlighted three stages: the experimentation phase which we are in now, commercialisation which is deemed medium term, and finally large-scale growth, predicted to occur in five to 10 years. 

With the main crux of the paper seemingly designed to encourage regulators to provide greater regulatory clarity and urge participants to proactively shape its future use, the research suggested that consensus is required among all stakeholders on robust risk management, globally harmonised legal and regulatory frameworks; and key calls to action to achieve network effects. 

Putting a number on tokenisation: The first estimate on the future of tokenisation we heard at Global Custodian came through Justin Chapman, global head of digital assets and financial markets at Northern Trust, who told us in October last year that: “By 2030, we expect that between 5% and 10% of Northern Trust’s assets under custody and administration will be digital assets – either cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), or tokenised assets.” 

The latest report from GFMA believes that the global value of tokenised illiquid assets is estimated to be worth ~$16+ trillion by 2030, from a base of ~$0.3 trillion today. If this occurs, then roles of market participants will certainly change, which brings us onto… 

The role of the CSD under the microscope: The role of the CSD in a DLT world has been discussed aplenty over the past decade, but this paper highlights to notion in multiple chapters. Firstly, it is stated that the most publicised potential evolution in market structure is collapsing the distinction between execution venues and clearing and settlement systems – i.e. seeing trading facilities compete with CSDs – however the paper believes the impact of this is low.  

Subsequently, the report goes into more detail by stating that “if settlement finality is recorded on a distributed ledger, CSDs could evolve to be a governor of DLT-based settlement systems, but in almost all other models, they are likely to remain a central actor in DLT-based settlement.” 

In a following chapter the report states that the impact on the CSD role and the custody chain could depend on the type of DLT-based security.  

“For security tokens, the CSD could evolve towards a governance role in enforcing standards and resolving disputes, while custodians and other intermediaries play a larger role in proposing and validating transactions, and safekeeping private keys on behalf of clients. In the case of tokenised securities, the CSD role and the custody chain would remain similar to the status quo for the traditional asset portion.” 

There will always be a role for the CSD, and given the timeframes we’re talking about with the developments of DLT in this space, those infrastructures will find a way to position themselves accordingly regardless.

Final thoughts: Given time restraints, it’s difficult to fully analyse everything about the paper, but the main takeaways we had are that this is another reminder of the potential of DLT which has been largely unfulfilled through widespread adoption in the securities space. Big savings, big efficiencies, big disruption…but little progress to-date. 

The paper gives five calls to action aimed at industry participants and regulators “to overcome existing barriers to adoption and advance the development of DLT-based capital markets”. 

These include harmonising global regulatory and legal frameworks, enabling interoperability, prioritising resources in asset classes where DLT has the most upside, collaboration and the continuation of the development of DLT-based payment solutions. 

The report is a good aggregation of a lot of information already out there and some bold predictions, but its very existence seems to stem from the lack of progress, which in turn means there’s nothing major to take from it in the short-term. Plus, a lot of effort is going to be going into T+1 readiness in the coming 12 months. 

Oh, and if anyone gets the Disney reference in the headline then… You’re welcome! 

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