Distributed Ledger Technology: Time to Shine

3 Markets and Securities Services | Distributed Ledger Technology: Time to Shine Markets and Securities Services | Distributed Ledger Technology: Time to Shine 2 DLT opens up new asset classes DLT is currently being trialled at a number of FMIs to help them support the trading and settlement of digital assets such as security tokens. In the case of security tokens, industry experts believe the digitalisation of difficult-to-trade assets in private markets (i.e. real estate, fine wine, etc) will help generate deeper liquidity by optimising the investment process. Beyond FMIs, a number of central banks are looking to leverage DLT as they explore the development of central bank digital currencies (CBDCs). Elsewhere, there are a series of initiatives focused on the creation and maintenance of StableCoins, namely crypto-currencies pegged to Fiat money or other assets such as government bonds. For many, digital assets are where the custody industry’s future lies. “We believe custodians will be supporting a number of new and different asset classes in the future. This is going to force the industry to evolve, and further develop their technology capabilities,” said Ryan Marsh, director, custody distributed ledger technology lead at Citi. Tangible progress has been made across a number of markets in regards to DLT and digital asset adoption. In Switzerland, the Swiss Digital Exchange (SDX) – which is operated by SIX, the country’s primary stock exchange group – is building a fully integrated issuance, trading, settlement and custody infrastructure for digital assets.  Singapore has also made impressive inroads with its DLT and digital asset development. In 2018, the Singapore Exchange (SGX) together with the Monetary Authority of Singapore (MAS) successfully trialled DLT to provide DVP for digital assets as part of its Project Ubin initiative. More recently, SGX used its DLT-enabled digital asset issuance platform to issue its first ever digital bond. Meanwhile, the Australian Securities Exchange is looking to replace its CHESS equities clearing and settlement system with DLT, although launch has been delayed to 2023. Increasingly, the technology is being used to establish new regulated FMIs (i.e. BondEvalue in Singapore, the UK’s Archax, etc.) as they look to take advantage of the growing investor interest in digital assets and processes. Driving operational efficiencies DLT will help bring about a number of operational advantages too. “One of the principal benefits of DLT is that it can significantly improve the way in which data is used within an ecosystem. Technology such as shared ledgers can ensure that golden source data is disseminated and distributed along value chains in a controlled and permissioned manner. The expectation is that this will increase the speed and integrity of data, synchronise activities and remove duplication and reconciliation, which not only improves efficiency but also reduces risk,” said Marsh. Enhancements to data distribution can also facilitate instantaneous trading and settlement, thereby helping to reduce intermediation, further increase efficiency and drive down industry costs. This was illustrated by a recent Citi survey at The Network Forum Autumn Meeting which revealed that 31% of respondents believed the biggest advantage of digital assets would be a more efficient post-trade settlement process, followed closely by access to new asset classes. When distributed ledger technology (DLT) was first revealed to the world, many within the securities services industry believed that this could be the solution to a number of challenges. With banks attempting to reduce their operating costs and eliminate inefficiencies across post-trade, DLT was widely viewed as being something of a remedy. Although the technology’s capabilities were initially over- hyped, major banks and Financial Market Infrastructures (FMIs) have since become increasingly targeted and pragmatic in how they apply DLT when looking to solve their real-world challenges. However, market participants also recognise that the absence of proper global standards is delaying critical mass adoption. More efficient post-trade settlement process / reduction in cost Better availability for trading (24/7/365) Access to new asset classes Increased liquidity in alternative or illiquid investments Potential for higher generated returns What does your firm see as the advantages of digital assets when compared to traditional instruments? Citi Digital Assets Survey 31% 17% 23% 20% 9%