Analysis: Blockchain needs MP3 music moment to win over markets
11/05/2022 07:00
* LedgerEdge joins mainstream use of blockchain
* Calls for more detailed regulation
* Banks wary of costs and being cut out of value chain
* Digital currencies would speed up blockchain progress
By Huw Jones
LONDON, May 11 (Reuters) - Blockchain needs its own music
industry 'MP3' moment as fragmented regulation and technology
hamper the development of a digital securities industry that
could help realise its full potential, industry officials said.
Blockchain, or distributed ledger technology (DLT),
underpins cryptoassets like bitcoin and allows many parties to
access a single version of data at the same time.
But extending its application to issuing, trading and
settling securities like stocks and bonds requires a common
digital format for the securities themselves, said Gerd Hartung,
head of new digital markets at Deutsche Boerse.
"The real topic is how do we get to the MP3 digital format
you see in the music industry. The next level we are getting to
is digitisation of the financial instrument itself," he said.
The digital MP3 file format, with its inferior audio
quality, did not look like a disruptive technology until the
arrival of MP3 players and streaming systems dramatically
altered the music industry, removing a slew of middle men and
almost all the barriers to entry faced by an artist.
A similar pivot in financial markets would allow an
instrument to be issued in hours rather than days or weeks,
better targeting specific markets and taking advantage of
windows of calm to reach more investors faster and free of data
errors, industry officials say.
But it would also challenge banks' dominant position in the
revenue chain for issuing and trading securities.
A further step from pilot project to live markets came this
week with the launch of LedgerEdge, described as the first
regulated, DLT-based corporate bond platform.
"Everyone is looking for greater clarity on the regulatory
definition of digital assets," said David Nicol, chief executive
and co-founder of LedgerEdge.
But with many elements yet to fall into place, Arjun
Jayaram, founder and chief executive of blockchain company Baton
Systems, warned there was unlikely to be a "big bang" moment.
Banks still use "very old" technology, making it harder to
interface with DLT platforms, he said, while Javier Hernani,
head of securities services at SIX which runs the Zurich and
Madrid stock exchanges, said hooking up to blockchain was a cost
that needed to be phased in.
Hernani also pointed to the need for digital versions of
currencies such as the dollar, euro or sterling to speed up
payment and achieve the full benefits of DLT, something the
relevant central banks have yet to decide on, let alone launch.
urn:newsml:reuters.com:*:nL1N2U11EX
Instead a "bridge" would be needed to allow digitised assets
to be traded, but paid for in fiat currencies, he suggested.
Regulators also need time to get to grips with the new
technology, with the European Union and Britain preparing 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 do that too," Britain's financial services minister John
Glen said in a speech last month.
The EU said its pilot regime would allow policymakers to
identify obstacles in regulation.
PARALLEL SYSTEMS
HSBC and Wells Fargo are already using blockchain from Baton
Systems to settle bilateral foreign currency trades, and in July
Deutsche Boerse will use its digital central register to offer
same day-issuance and paperless processing for digitised
certificates and warrants in its Clearstream settlement arm.
urn:newsml:reuters.com:*:nL8N2SY285
"We have done the proof of concepts in the past, but now
it's really about bringing the real, fully-fledged financial,
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 is aiming to open a payments account for
tokenised assets at the Bank of England in October. urn:newsml:reuters.com:*:nL5N2VL2RJ
Meanwhile, the U.S. Depository Trust & Clearing Corp's
platform that leverages DLT is moving to a development phase for
same-day settlement of securities trades, compared with two days
at present.
Consultants estimate potential savings of 50% from using
blockchain https://www.accenture.com/_acnmedia/PDF-119/Accenture-Banking-on-Blockchain.pdf#zoom=50
in areas like settlement, mainly through cutting time-consuming
'reconciliation' or the fixing of mismatches in transaction
data.
Faster completion of trades also means less risk and
therefore less capital tied up in backing 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" could reduce
costs by one-third.
Combining DLT with a machine-readable blueprint for how
derivatives are managed and traded could cut the cost base for
derivatives dealers by $3.2 billion, it says.
SIX, which launched a digital bond in November, senses
progress this year. urn:newsml:reuters.com:*:nL1N2S91W9 urn:newsml:reuters.com:*:nL8N2ML346
"We are going from proof of concept to the real world,
slowly," the company's Hernani said.
"We will continue to see some real business, but still in
the small numbers. I think there will be parallel systems for a
while."
(Reporting by Huw Jones; Editing by Kirsten Donovan)
((huw.jones@thomsonreuters.com; +44 207 542 3326; Reuters
Messaging: huw.jones.thomsonreuters.com@reuters.net))