Distributed Ledger Technology: Time to Shine

7 Markets and Securities Services | Distributed Ledger Technology: Time to Shine Markets and Securities Services | Distributed Ledger Technology: Time to Shine 6 Overcoming the barriers to adoption There are a number of operational challenges with the technology itself and some of the new processes that will be supported by it. Immediate atomic trading and settlement is one such example. “Immediate settlement can cause problems. At the moment, market participants settle on T+2 but a shift to immediate atomic trading and settlement would force counterparties to pre-fund their transactions creating liquidity problems. It is possible custodians could provide credit lines in order to solve this problem,” said Marsh. Moreover, simply layering DLT onto existing mainframe technology is not viable either and could actually exacerbate operational risk. As a result, integrating DLT into legacy systems will need to be carried out carefully. Most significantly, DLT adoption rates will stay subdued unless standards are created. “Our industry is very mature and has spent a great deal of time defining standards around operational processes and financial messaging. The issue with DLT is that there is a significant lack of standards meaning several different types of DLT protocols and associated processes have emerged,” added Marsh. In the absence of any common standards, the progress of interoperability solutions between different financial DLT systems will be impacted. “More broadly, as highlighted in our recent survey, other challenges facing DLT include a lack of established markets and internal technology investment. These will need to be overcome before we will see wider adoption of DLT in this space,” added Teychenne Progress so far Regulators have largely been receptive to DLT. For example, the European Commission’s (EC) recently published Digital Finance Package contains proposals outlining a pilot scheme for FMIs looking to incorporate DLT into their operating models. The EC’s package also argues for the establishment of an EU-wide harmonised framework to oversee the issuance of crypto-assets. “Regulators in France, Germany and Switzerland are also being proactive about DLT and digital assets. Now that leading market regulators are beginning to champion DLT, this will help accelerate the industry’s adoption of the technology,” said Teychenne. DLT: Getting to the next stage If rolled out successfully, DLT will have a major impact on how securities markets operate by driving efficiencies in trading, settlement and asset servicing. Although the technology has massive potential, it will only thrive if the industry finds agreement on the standards governing it. “If the industry is to agree on standards, it is vital that market participants reach out and engage with industry associations rather than conducting bilateral discussions between themselves,” said Marsh. Moving forward, it is critical the securities services industry finds a way to monetise this technology in order to generate benefits for the entire value chain. If the securities services industry achieves this important milestone, DLT will truly shine. Lack of secure and regulated custody services The infrastructure to support the end-to-end asset lifecycle is not mature enough Lack of clear regulation Lack of established or mature markets Lack of available internal technology investment What challenges is your firm facing with your digital asset activity? Citi Digital Assets Survey 21% 24% 24% 16% 16%