The Global Financial Markets Association (GFMA) released a report that examines the potential benefits of distributed ledger technology (DLT) for capital markets.
The report, The Impact of Distributed Ledger Technology in Global Capital Markets, evaluates the opportunities and risks of DLT and DLT-based securities. It also assesses the applicability of existing legal, regulatory, and risk management frameworks. To illustrate the potential of DLT in capital markets, it examines three emerging use cases: collateral management; tokenization of assets; and sovereign and quasi-sovereign bonds.
The report finds that DLT could unlock transformative cost-saving and operational efficiency benefits – including approximately $20 billion annually in global clearing and settlement costs. It could also foster growth, broader market access, and new liquidity pools when operating at scale.
Further, the report – done in conjunction with Boston Consulting Group (BCG) and Clifford Chance and Cravath, Swaine & Moore – included a call to action for industry participants and regulators. The five recommendations are as follows:
- Harmonize global regulatory and legal frameworks for clear and unambiguous definition of the key terms and risk mitigants required to support the development of a transparent, disciplined, risk-focused, and effective digital market infrastructure.
- Enable interoperability by building consensus on common standards and vision for DLT-based markets to guide market linkages with traditional market infrastructure.
- Drive faster adoption by prioritising resources in asset classes where DLT has the most upside potential to help pool and deepen liquidity, particularly for illiquid assets.
- Collaborate on the advancement of DLT to promote technical solutions, including around scalability, cybersecurity, and regulatory compliance.
- Continue the development of DLT-based payment solutions, such as tokenized commercial bank money and deposits, to facilitate safe and efficient settlement processes.
“Distributed Ledger Technology holds promise for driving growth and innovation. This potential should not be ignored or prohibited where regulatory oversight and resiliency measures already exist. Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets while also setting out a level playing field for both new entrants and regulated financial institutions. A technology-neutral and outcomes-based approach to regulation is crucial. The goal of our latest report is to help policy makers and financial market participants to find a way forward that ensures appropriate stability and protections, while also allowing the industry and economy to harness the benefits of this new technology,” Adam Farkas, chief executive of the GFMA, said.
The report also sets out the foundations of a global taxonomy for digital assets to encourage both industry participants and policymakers to work from a baseline with harmonized definitions.
“Distributed ledger technology has the transformative potential to further improve efficiency across the capital markets value chain. However, there are critical barriers to large-scale adoption beyond just legal and regulatory roadblocks, including a lack of cross-industry alignment on use cases, limited operational readiness, and a need to further develop interoperable technology standards and infrastructure. Our report examines these barriers and outlines actions to unlock potentially game changing efficiency and innovation across the capital markets industry,” Roy Choudhury at BCG said.