As the financial world scrambles to keep up with the advances of modern technology, traditional finance groups like the Global Financial Markets Association (GFMA) are eager to jump on the wagon. On Tuesday evening, the GFMA published a report calling on regulators to allow distributed ledger technology (DLT) to be used in securities markets for several purposes, such as collateral management, asset tokenization, and sovereign bond markets, among others.
Billions in Savings & Major Players Embrace
DLT (Distributed Ledger Technology) is gaining momentum in traditional finance. It has the potential to save over $100 billion annually in financial resources from a $19 trillion market, plus an additional $15-20 billion in operational costs.
JP Morgan Chase, HSBC, Nomura, and Euroclear are exploring DLT, with Euroclear planning to launch its own DLT bond trading platform. The European Central Bank is also considering adopting DLT in its financial systems.
At the heart of the promise of DLT is its ability to free up collateral floating around in derivatives and securities lending; a figure estimated to be in the hundreds of billions of dollars annually.
This process is made easier due to the ‘decentralized’ aspect of the technology, allowing the trade and settlement process to automate through the use of ‘smart contracts’ and other similar tools. This could drastically lower the cost of large-scale transactions, mergers, and splits.
Financial Markets Embrace Blockchain Technology
Fueled by the continued growth and enthusiasm from the traditional finance world, the most recent development for the integration of DLT to financial markets comes from the European Union, with the rollout of its ‘DLT pilot regime’ just last week.
This new framework clarifies how those wishing to run a financial market based on DLT can apply for certification, as well as stipulates the ‘knowledge of the functioning of DLT technology’ required in order for regular investors to access the platform.
Surge of Investment into DLT Technology
It’s clear that DLT has shifted out of its experimental phase in traditional markets, and it has the potential to further revolutionize the securities market, allowing for greater cost savings in collateral and reducing operational costs.
With the completion of the new pilot regime launching in March and the looming emergence of Euroclear’s DLT platform, we can expect to see a surge of investment into DLT technology, unlocking an estimated $115 billion+ of savings for the securities market.
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