• Thu. Jun 23rd, 2022

Analysis: Blockchain needs a moment of MP3 music to conquer the markets

ByTina R. Wimmer

May 11, 2022
  • LedgerEdge joins mainstream use of blockchain
  • Asks for more detailed regulations
  • Banks are wary of costs and are excluded from the value chain
  • Digital currencies would accelerate blockchain progress

LONDON, May 11 (Reuters) – Blockchain needs its own “MP3” moment in the music industry as fragmented regulation and technology hinder the development of a digital securities industry that could help realize its full potential, industry officials said.

Blockchain, or Distributed Ledger Technology (DLT), underpins crypto-assets like bitcoin and allows many parties to access a single version of data at the same time.

But extending its application to the issuance, trading and settlement of 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.

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

The MP3 digital file format, with its lower audio quality, did not look like disruptive technology until the arrival of MP3 players and streaming systems radically changed the music industry, eliminating a multitude of intermediaries and almost every barrier to entry encountered 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 without data errors, according to industry officials.

But it would also challenge the dominant position of banks in the chain of securities issuance and trading revenues.

A further step in the pilot to live markets came this week with the launch of LedgerEdge, described as the first DLT-based regulated corporate bond platform.

“Everyone is looking for greater clarity on the regulatory definition of digital assets,” said David Nicol, CEO and co-founder of LedgerEdge.

But with many pieces still to be put in 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, which makes it more difficult to interface with DLT platforms, he said, while Javier Hernani, head of securities services at SIX, which manages stock exchanges from Zurich and Madrid, said that connecting to the blockchain was a necessary cost. to be implemented gradually.

Hernani also pointed to the need for digital versions of currencies such as the dollar, euro or pound sterling to speed up payments and take full advantage of DLT, something the relevant central banks have yet to decide, let alone launch. Read more

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

Regulators also need time to familiarize themselves with the new technology, with the European Union and Britain preparing to test DLT in market infrastructure.

“We intend to have this in place next year, and if this tells us that we need to update relevant legislation, we will do so as well,” UK Financial Services Minister John Glen said in a statement. a speech last month.

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


HSBC and Wells Fargo are already using Baton Systems’ blockchain to settle bilateral currency transactions, and in July Deutsche Boerse will use its digital central ledger to offer same-day issuance and paperless processing of certificates and money orders scanned into its Clearstream settlement branch. Read more

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

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

Meanwhile, the US Depository Trust & Clearing Corp’s platform that operates the DLT is moving into a development phase for same-day settlement of securities transactions, up from two days currently.

Consultants estimate potential savings of 50% by using block chain in areas like settlement, primarily by reducing tedious “reconciliation” or fixing inconsistencies in transaction data.

Faster completion of trades also means less risk and therefore less capital tied up in backing trades.

With regard to the derivatives market, Deloitte estimates that a “single shared version of business data” could cut costs by a third.

Combining DLT with a machine-readable blueprint for how derivatives are managed and traded could reduce the cost base of derivatives dealers by $3.2 billion, it says.

SIX, which launched a digital bond in November, expects progress this year. Read more

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

“We will continue to see real business, but still in small numbers. I think there will be parallel systems for some time.”

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Reporting by Huw Jones; Editing by Kirsten Donovan

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