Careful consideration should be given to the application of distributed ledger technology (DLT) to the settlement of securities, according to a regulatory report.
A report produced by the Financial Industry Regulatory Authority (FINRA) indicated the difficulties that may arise with the application of DLT to settlement.
The report suggests that under a DLT-based infrastructure, clearing and settlement of securities transactions may occur outside of traditional infrastructure leading to a potentially unclear distinction between trade execution and settlement.
According to the report, this may lead to broker-dealers and market participants considering whether their activities in a DLT environment meet the definition of a clearing agency and remain compliant with regulations.
In addition, the report noted how the development of a DLT environment that alters the clearing and settlement process for securities may also impact introducing broker and clearing broker relationships as well as their existing roles and responsibilities.
Blockchain technology has been hailed by custodians as being the future of the industry with potential to streamline processes such as settlement, clearing and corporate actions.
Last November, Deutsche Boerse and Deutsche Bundesbank teamed up to launch a functional blockchain prototype for the settlement of securities.
The prototype was designed to provide settlement of securities and securities transfers against both instant and delayed payment.
Other industry participants have expressed doubts over the implementation of blockchain to settlement transactions.
Speaking at London’s FinTech week last July, Simon Taylor, former Blockchain R&D VP and co-founder of Blockchain 11:FS suggested that in spite of blockchain’s origins lying in settlement, the technology should be focused elsewhere.
“People look at blockchain technology and assume that because bitcoin did settlement, blockchain should be used for settlement when settlement is one of the hardest things to solve using blockchain,” he said.
“Think about what settlement means, its finality of settlement that is you have now got the money through all the intermediaries and everybody has been notified and everything has been cleared.
“In capital markets, typically you don’t 100% pre fund a trade as you’re performing different kinds of operation, so settlement is a problem but not the first problem we should solve.”