From Blind Trust to Educated Optimism – Overcoming Barriers to Institutional DLT Adoption in Finance

HodlX guest post Submit your contribution

The financial and fintech news of late 2022 and early 2023 may have caused uncertainty among some financial institutions and digital asset skeptics.

Nevertheless, it facilitated the historic transition from blind trust to educated optimism regarding cutting-edge financial technologies, particularly DLT (distributed ledger technology).

Anyone who closely monitors the financial landscape today sees increasing opportunities for institutional investors to advance blockchain adoption.

In fact, 93% of institutional investors believe in the long-term value of blockchain technology for finance and 74% intend to increase their allocations to the digital asset space in the coming year.

As the digital asset infrastructure continues to develop, we are seeing increasing interest from institutional investors.

However, there are certain challenges faced by traditional financial institutions looking to implement blockchain solutions.

The question remains – How can this interest be translated into concrete action?

Let’s address the key obstacles standing in the way of truly universal mass adoption of DLT in financial services.

What DLT brings

DLT is a backbone of blockchain that allows data to be recorded, shared, and synchronized across multiple locations without the need for a central authority.

DLT is a catalyst for innovation. It democratizes access to capital and helps issuers and other market participants unlock new opportunities – from securities issuance to settlement, trading and service.

The use of DLT in securities markets can generate annual savings of more than $100 billion, freeing up outstanding collateral in segments such as derivatives and securities lending.

Implementing smart contracts to automate settlement and corporate actions processes for stock splits and mergers can reduce operating costs by $15 billion to $20 billion.

DLT operates at scale and has the potential to unlock new pools of liquidity, such as the predicted $16 trillion global market for tokenized illiquid assets by 2030.

In this way, blockchain represents the long-awaited technological leap in the post-trade landscape, encompassing custody, asset transfer and settlement.

This innovation has the potential to establish a global, asset-agnostic trading and settlement platform that operates 24/7 and is accessible worldwide.

Below, we move away from the limitations of asset-specific, dedicated and centralized settlement infrastructures and promote a more connected and efficient ecosystem.

The advancement of technology paves the way for a truly global market and removes country-specific barriers.

Additionally, DLT creates liquidity corridors that unite issuers and investors across borders, fostering unprecedented opportunities for growth and collaboration.

So what are the barriers to the maturity of this breakthrough technology into full institutional use?

Challenges ahead and ways to address them

The biggest challenge is to adapt appropriate universal laws that traditional financial institutions can rely on.

Currently, the legal framework is very national and tailored to specific assets, hindering global adoption.

To materialize this vision of a global ecosystem where assets can be seamlessly exchanged and transacted, market participants and decision-makers must adopt asset-agnostic regulations.

Such forward-looking regulations will strengthen the future in which finance transcends boundaries and reaches new heights of efficiency and accessibility.

Another related obstacle is the lack of international standards and solutions for the introduction of a universal ID and credentialing system, which is essential for realizing the full potential of decentralized banking.

To address this issue, tech-savvy banks can work with regulators to create a unified framework for universal IDs, ensuring seamless integration and greater security for individuals and businesses.

Perhaps the biggest hurdle for banks to initiate from within will be change management. We’re not just referring to financial institutions’ ability to adapt their operations and technology stack.

Change implies the redesign of an entire business model in the face of a major paradigm shift. It means taking care of instant settlement, liquidity provision and cross-border operations and potentially 24/7.

A difficult pill to swallow soon will be the loss of current revenue streams.

These revenue channels have historically been due to market inefficiencies that are inevitably addressed by blockchain solutions.

Paving the way to success

Recent developments in fintech and finance have led to a shift in perception towards digital assets and DLT.

Institutional investors are increasingly recognizing the long-term value of blockchain technology.

And with the right approach, the industry opens up to new challenges and growth opportunities, offering a future of connected and efficient financial ecosystems.

As you can see, the main challenges to institutional adoption of digital assets are not inherent in the nature of blockchain technology itself.

On the contrary, the innovative future of banks and FMIs depends on their ability to embrace change and not become complacent, similar to Kodak’s unfortunate fate, by remaining agile and visionary.

By addressing the issues of global standardization and change management, we can pave the way to a blockchain-based future that will inevitably reshape the financial landscape over the next five to ten years.

Alexandre Kech is Head of Digital Securities at SIX Digital Exchange (SDX) and a prominent figure in the world of banking and digital assets with over 20 years of experience in the field. Alexandre has worked for several leading financial industry companies, including BNY Mellon, SWIFT and Citi Ventures.

Check out the latest headlines on HodlX

Follow us on Twitter, Facebook and Telegram

Check out the latest industry announcements

Disclaimer: Opinions expressed on The Daily Hodl do not constitute investment advice. Investors should conduct their due diligence before making any risky investments in Bitcoin, cryptocurrencies or digital assets. Please note that your transfers and transactions are at your own risk and any losses you incur are your responsibility. The Daily Hodl does not recommend the purchase or sale of cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

Featured image: Shutterstock/gonin

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers