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Blockchain needs MP3 music moments to conquer markets

Markets
By Sydney Barrett
Reuters

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Publication date:

May 11, 2022 • 32 minutes ago • 4 minutes read • Join the conversation

LONDON – Blockchain needs its own “MP3” moment in the music industry as fragmented regulation and technology impede the development of a digital securities industry that could help realize its full potential, industry officials said.

Blockchain, or distributed ledger technology (DLT), powers cryptoassets like bitcoin and allows many parties to access a single version of data at the same time.

But extending the application to issuance, trading and settlement of securities such as stocks and bonds requires a common digital format for the securities themselves, said Gerd Hartung, head of emerging digital markets at Deutsche Boerse.

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“The real issue is how do we get to the digital MP3 format that you see in the music industry. The next stage we are reaching is the digitization of the financial instrument itself,” he said.

The MP3 digital file format, with its inferior audio quality, didn’t look like a disruptive technology until the advent of MP3 players and streaming systems dramatically changed the music industry, removing a number of middlemen and almost all barriers to entry for artists.

A similar pivot in financial markets would allow an instrument to be issued in hours rather than days or weeks, better target specific markets, and use calm windows to reach more investors faster and without data errors, industry officials say.

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But it would also challenge banks’ dominance in the revenue chain for securities issuance and trading.

Another step from the pilot to live markets came this week with the launch of LedgerEdge, billed as the first regulated, DLT-based corporate bond platform.

“Everyone is looking for more clarity in the regulatory definition of digital assets,” said David Nicol, chief executive and co-founder of LedgerEdge.

But with many elements still to fall into place, Arjun Jayaram, founder and chief executive officer of blockchain company Baton Systems, warned that a “big bang” moment is unlikely to happen.

Banks are still using “very old” technology, making it more difficult to connect to DLT platforms, he said, while Javier Hernani, head of securities services at SIX, which operates the Zurich and Madrid stock exchanges, said that the connection blockchain is a cost factor that needs to be introduced in phases.

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Hernani also pointed to the need for digital versions of currencies like dollars, euros or pounds sterling to speed up payments and take full advantage of DLT, something the relevant central banks have yet to decide on, let alone launch.

Instead, a “bridge” would be needed to allow trading of digitized assets but paid for in fiat currencies, he suggested.

Regulators are also taking time to get acquainted with the new technology as the European Union and UK prepare to test DLT in market infrastructure.

“We intend to have this up and running next year and if it teaches us that we need to update the relevant legislation then we will,” said UK Finance Minister John Glen in a speech last month.

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The EU said its pilot regime would allow policymakers to identify barriers to regulation.

PARALLEL SYSTEMS

HSBC and Wells Fargo are already using Baton Systems’ blockchain to settle bilateral foreign exchange trades, and in July, Deutsche Boerse will leverage its digital central registry to offer same-day issuance and paperless processing for digitized certificates and warrants in its Clearstream settlement arm.

“We’ve done the proof of concept in the past, but now it’s really about getting the real, full-fledged financial and digital market infrastructure in place, and that needs to be productive and scalable,” Hartung said.

Rival Euroclear has joined blockchain consortium Fnality — backed by banks including Santander, Barclays, Credit Suisse, MUFG and UBS — which intends to open a payment account for tokenized assets with the Bank of England in October.

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Meanwhile, US Depository Trust & Clearing Corp’s platform, which uses DLT, is transitioning into a development phase for same-day settlement of securities trades, compared to the current two days.

Advisors estimate potential savings of 50% by using blockchain https://www.accenture.com/_acnmedia/PDF-119/Accenture-Banking-on-Blockchain.pdf#zoom=50 in areas like settlement, mainly through the Reducing the time spent “reconciling” or resolving discrepancies in transaction data.

Closing trades faster also means less risk and therefore less capital tied up in hedging transactions.

Looking at the derivatives market, Deloitte https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/future-of-post-trade.pdf estimates a “Single Shared Version of Trade Data”. cut costs by a third.

Combining DLT with a machine-readable blueprint for managing and trading derivatives could reduce the cost base for derivatives traders by $3.2 billion, it says.

SIX, which launched a digital bond in November, is seeing progress this year.

“We’re slowly moving from the proof of concept to the real world,” Hernani said of the company.

“We will continue to see some real deals, but still in small numbers. I think parallel systems will continue to exist for a while.”

(Reporting by Huw Jones; Editing by Kirsten Donovan)

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