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A market meltdown and the implosion of FTX might have dulled investors’ enthusiasm for crypto in 2022, but industry misfortunes haven’t slowed efforts to transform capital markets through distributed ledger technology (DLT).
A host of banks, exchanges, technology companies, and industry consortiums are developing viable use cases for DLT in capital markets. Today, DLT solutions are operating in corporate bonds, securitized loans, private equity, repo, and other markets.
The advance of these platforms from proof of concept to commercialized products is encouraging more market participants and technology providers to join existing DLT initiatives, or to launch projects of their own. During the past three years, I’ve headed up Broadridge’s Distributed Ledger Repo solution (DLR), the company’s biggest DLT venture to date.
DLR has been fully operational for well over a year, with several clients onboarded and averaging more than $50 billion in average daily volume. Based on that experience, I would offer the following recommendations to companies planning or currently managing a DLT capital markets development project:
Identify an area of the market where applying DLT can generate benefits at scale, rather than incremental improvements. Find a segment where DLT’s unique characteristics can create a step-change in efficiency, liquidity, or cost minimization.
Fixed income markets offer an excellent example of DLT in action. The technology makes it easier to leverage smart contract technology, which can help digitize and mutualize workflows between counterparties, or execute corporate actions such as bond coupon payments and principal repayment. Tokenization can enhance securities velocity and liquidity, reduce settlement times, and lower costs during the security’s lifecycle. Firms should consider pairing up the most intractable pain points in the industry and within their organizations with targeted DLT capabilities, such as smart contracts and tokenization, when evaluating DLT initiatives.
DLT might someday transform the entire fixed income market. However, trying to orchestrate change on that level right out of the gate is a recipe for failure.
Deploying a brand-new technology is a challenge, even in a limited use case. This becomes even more complex if deployment requires cooperation among many different market participants. Regardless of the market, start with controlled use cases that can generate real benefits for participants within a business or function that is largely self-contained, and presents low barriers for adoption.
Find opportunities to deliver immediate benefit to participants. In capital markets, the benefits of a DLT solution is predicated on the ability to develop a significant network effect. Even the most effective demonstrations of DLT can falter if it doesn’t create enough participant scale. For that reason, developers should initially focus on use cases that have the potential to produce immediate tangible benefits at low risk in order to incentivize clients to join.
This is the strategy we followed at Broadridge when we developed DLR. In many ways, repo is the ideal market for DLT. It is largely self-contained and features the type of complex, multi-party workflows that DLT was designed to address. Our clients recognized immediately that the DLR platform would increase collateral liquidity, lower costs, reduce risk, and reduce settlement cycle. These benefits helped attract major banks and other large repo market participants early in the process, generating the momentum the platform needed to grow and succeed.
Companies should embark on DLT projects with a realistic understanding of the challenges they face. DLT is becoming a mainstream technology and will deeply transform capital markets, but we are still in the earliest stages of that process, as standards form around technologies, protocols and rules. Despite these risks — and independent of any drama in cryptocurrencies — I believe firmly that these early days of DLT represent a once-in-a-generation opportunity for companies able to select the right application and execute on DLT development projects effectively in the capital markets.
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