- DLT (Distributed Ledger Technology) has numerous compelling use cases in capital markets, offering benefits such as enhanced efficiency, cost reduction, and real-time data access.
- Applications of DLT include asset registers for asset managers, clearing and settlement for exchange-traded assets, tokenization for trading unlisted securities, streamlined payments, bank finance transformation, fund administration, and customer identification.
DLT (Distributed Ledger Technology) has emerged as a groundbreaking technology with the potential to transform the capital markets. By establishing a “single version of the truth,” DLT enables seamless collaboration across corporate boundaries and existing market structures, offering a range of compelling use cases. Let’s delve into the most significant applications of DLT in the world of finance and explore how this technology is reshaping the industry.
HSBC, the largest Europe-based Bank 🏦 by total assets, mentions the #XRP Ledger for cross-border payments.
The Financial Institution alone handles nearly $250bn per year in foreign exchange.
It also referred to DLT as a “game changer.” pic.twitter.com/Wm2ObQ4vSj
— EDO FARINA 🅧 XRP (@edward_farina) May 31, 2023
One of the most apparent use cases for DLT is its role as a single asset register for asset managers or broker-dealers. This “golden source” eliminates the need for internal reconciliations, enhances capital efficiency, and provides controlled access to real-time data for clients and regulators. By extending this concept to multiple market participants, DLT opens up immense potential benefits in the post-trade arena.
For exchange-traded assets, the Australian Securities Exchange (ASX) exemplifies this potential by announcing its decision to transition its cash equities clearing and settlement onto Digital Asset’s proprietary ledger by 2021. This move aims to streamline operations and enhance efficiency. Moreover, mutually-operated ledgers, such as Corda by the R3 consortium, have the ambitious goal of transforming clearing, settlement, and reporting for OTC securities and derivatives markets.
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Such a ledger would not only enhance operational efficiency but also release significant amounts of capital by reducing settlement periods and providing a single view of collateral assets.
DLT also has the potential to act as a trading venue, not just a settlement venue, through tokenization. Tokenization allows tokens to represent legal ownership of financial assets, enabling on-ledger trade execution, reducing operational and capital costs, and generating liquidity by connecting more issuers and investors. Furthermore, the divisibility of tokens can enable fractional ownership of securities, funds, or property.
Beyond securities, DLT offers compelling applications in various other areas of capital markets. In payments, DLT streamlines end-to-end value transfers, reducing costs, operational risks, and settlement periods. Ripple’s XRP ledger is a prime example, providing real-time cross-border settlements using tokens representing central bank currencies.
Additionally, DLT can transform bank finance by providing a shared record of shipments, ownership, financing, and insurance, thereby streamlining syndicating lending and trade finance.
Fund administration can also benefit from DLT, as it eliminates complexities by recording the creation, redemption, and transfer of fund units. This technology unifies cross-border sales, processing, and transfer agency, simplifying the overall process. Major platform providers such as Calastone and Fundsquare are actively developing new “distributed market infrastructures” based on blockchain.
Lastly, a distributed ledger could host a shared record of beneficial owners, enhancing customer identification. This utility would provide appropriate, permissioned access to market participants, allowing immediate KYC (Know Your Customer) and AML (Anti-Money Laundering) checks, facilitating client onboarding, and improving tax reporting.
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