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December 2020

Distributed ledger technology in the capital markets – from pre-trade to post-trade

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Distributed Ledger Technology (DLT) is perhaps most famously known as the technology that underlies Bitcoin, called Blockchain in this instance, however it is so much more than that. A simplistic definition would that DLT is shared IT infrastructure that allows individuals or corporations to collaborate. It assists in the efficient transfer of value and enforces trust in a digital manner. But where does the technology stand in actual terms?

Philippe Seyll, CEO, Clearstream Banking S.A,

Given this underlying enforcement of trust and efficient transfer of value, it becomes particularly useful within the Capital Markets. Such is the impact of the technology that it has the potential to define new operating models through process automation within operations, all the while bringing the benefits of market liquidity to various new asset classes through tokenisation. It provides easier, cheaper, more transparent and more efficient access to capital.

From pre-trade to post-trade, DLT is impacting Capital Markets across the globe. To Philippe Seyll, CEO of Clearstream Banking S.A., some of the use cases that Clearstream are working on have the power to “redefine the overall distribution chain of the fund business” and will see measurable benefits for market participants, including faster time to market and cheaper access to funds. Luc Falempin, CEO of Tokeny, explains that for investors, the clear benefits he sees are increased liquidity in the market and cost reduction, however “cost reduction is still not quite there, largely given the fact that the value chain is still new and participants still rely heavily on existing frameworks that have yet to be updated.”

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DLT plays well with what regulators across Europe are promoting; equal, seamless, and as cost-effective as possible access to investment funds.

Philippe Seyll, CEO, Clearstream Banking S.A

Olivier Portenseigne, CEO of FundsDLT, notes that given the benefits of faster, easier, and cheaper access to capital, these technologies “favour financial inclusion and making finance available to all.” Seyll touches on this point as well, noting that “this (DLT) plays well with what regulators across Europe are promoting; equal, seamless, and as cost-effective as possible access to investment funds.”

Alongside benefits to the end investor, DLT can provide issuers with an overview of the market that they’ve not been able to obtain up to this point. Given the possibilities of disintermediation, DLT can enable issuers to determine who is purchasing the product. To Portenseigne, this brings Capital Markets closer to other industries that are far better at leveraging the data they possess. “If you examine what other industries are doing with data, blockchain can provide financial services with the ability to propose increasingly customised, personalised and adaptive products to investors.”

Olivier Portenseigne, CEO, FundsDLT

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If you examine what other industries are doing with data, blockchain can provide financial services with the ability to propose increasingly customised, personalised and adaptive products to investors.

Olivier Portenseigne, CEO of FundsDLT

Tokenisation, another emerging use case for DLT, also brings significant benefits to the market through the introduction of liquidity into secondary market trading in assets that were previously highly illiquid, such as real estate, fine art, or even forestry assets. Tokenisation further brings increased transparency to the market and creates “a full digital experience for the issuer by applying compliance automatically and for the end investor given they are able to view their position on the blockchain at any point and make transfers at any point” according to Falempin.

However, Seyll notes that when it comes to DLT it is critical to “separate the hype from what makes sense – do the solutions that it brings truly change the IT stack and deliver significant cost reductions?” For Seyll, many incumbents have yet to latch on to the technology as it has a connotation of being disruptive, and while it may disrupt competitors, you may also disrupt yourself. For Clearstream, a clear incumbent with 50 years of experience, Seyll says DLT “is not an incremental move, it is a quantum leap.”

Luc Falempin, CEO, Tokeny

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The role of the custodian will be completely different because they don’t need to keep the asset as they are on the blockchain, rather they will need to provide new services as they control the asset.

Luc Falempin, CEO, Tokeny

Falempin, discussing tokens, echoes that the technology can be considered disruptive, especially relating to traditional operations such as custody. Given that assets are digitised “the role of the custodian will be completely different because they don’t need to keep the asset as they are on the blockchain, rather they will need to provide new services as they control the asset.” Tokens often still represent grey areas for many financial institutions, however he notes that European regulators have been particularly proactive in this space and the majority of large financial institutions already have POCs underway.

A key issue that seems to underlie a lack of adoption stems from the lack of interoperability between various blockchains. If all players launch their own protocols, in the end you simply recreate the siloes you sought to remove from traditional finance. For Portenseigne however this is simply a good excuse. “While blockchain technologies may be to an extent immature, which is less and less the case, a simple way to integrate one blockchain with another is to connect through APIs – we’ve (FundsDLT) have tested this and typically it works.”

As an ever-increasing number of players move concretely towards the implementation of DLT use cases, the challenges that are raised will be overcome and the concerns surrounding the disruptive nature of the technology are likely to fall away. Seyll notes that DLT at Clearstream is a clear use case technology, and not a POC; “the difference is not just semantic, with use cases we are clearly almost ready to launch.” While Clearstream may be ahead of the game, for Portenseigne, the rest of industry is not quite there, as he notes that “while we are seeing more and more use cases that will be launched very shortly, and fast growing interest from the fund industry, it will be a long journey to full adoption – it’s more of a transformation or evolution than a revolution, but actors needs to move now otherwise they will stay on the platform of the train that already left the station.”