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WEF: Little market-wide agreement on DLT use in capital markets

WEF: Little market-wide agreement on DLT use in capital markets

A report from the World Economic Forum (WEF) and Boston Consulting Group (BCG) has found that while distributed ledger technology (DLT) offers the potential for significant market-wide transformation, market participants are still far from adopting this technology at scale at a market-wide level.

The in-depth report explores the market forces pushing participants toward DLT across capital markets, noting that several regulators have expressed greater comfort with DLT over the past few years and that certain DLT enabled products and services have moved from exploration and experimentation to commercialisation.

Based on eight workshops, just under 200 interviews with executives from leading financial services and fintech firms, and an anonymised survey from over 60 firms, the report examines the key learnings and use cases to come from efforts around leveraging the technology over the past decade.

Matthew Blake, head of the future of financial services, World Economic Forum, states that “Following several years of intense hype, examples of use cases where inefficiencies and challenges are being solved with blockchain are starting to emerge across capital markets. With the future for blockchain in financial services still being defined, a nuanced look at the opportunities this technology offers right now is particularly important for the financial services industry.”

Five key insights detailed in the report include findings that:

  1. Market forces, support by regulatory and technical developments are pushing participants in capital markets to digitise and consider the use of DLT;
  2. The underlying challenges that DLT is trying to solve are real and substantial, and while it is not the optimal technology for every proposed use case, experiments are proving its viability in addressing significant operational inefficiencies and improving balance sheet management;
  3. While many DLT and smart contract use cases in capital markets are now live across jurisdictions, grand visions of disintermediation or total digital transformation at scale are still far from being realised;
  4. While emerging DLT use cases are being developed collaboratively, there is no single industry-wide vision of the future in most jurisdictions; and,
  5. While greater digitisation is inevitable, substantial headwinds may continue to limit adoption of DLT.

Presenting both an opportunity and a threat to traditional capital markets institutions, the report explains that in order for DLT to fundamentally transform markets, new ways of thinking and working will need to be adopted.

It raises three potential factors to assist this new approach, including: the need for market-wide data standardisation, breaking down traditional organisational siloes for capital markets firms to deliver valuable tech products to clients, and a call for regulators to continue fine-tuning their approach to encouraging innovation and avoiding global fragmentation.

The report concludes that while DLT is beginning to address real challenges, there is no agreed upon path for market-wide adoption. It reads: “the coming years are likely to see increasing digitisation of markets, including more DLT use cases going live. Nevertheless, there is still little market-wide agreement on how DLT will ultimately be used and whether it will fundamentally reshape all elements of the capital markets.”

“Distributed ledger technology has come of age as it begins to enhance efficiencies, reduce operating costs and create new business models in capital markets, but the use cases and solutions are respective to each asset class,” comments Kaj Burchardi, managing director, BCG Platinion.

“Whilst this makes sense from a commercial perspective, it has led to a complex patchwork of initiatives. For capital markets to unilaterally adopt DLT, they will require cross-institutional alignment to realise the game-changing market opportunities it can offer,” adds Burchardi.

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