Although there is no shortage of distributed ledger technology (DLT) prototypes and real-world experiments in the post-trade space, a “clear business case” has yet to emerge for the technology, according to a new report from the European Central Bank (ECB).
The report said that various institutional actors and market players are currently experimenting with DLT with a view to potentially enhancing efficiency and reducing costs. However, the lack of common practices and standards for its adoption could increase the degree of market fragmentation.
In order for the technology to succeed there needs to be a greater degree of interoperability with DLT based solutions based on common practices and standards that enable systems to interact with both each other and conventional systems.
One of the biggest challenges is that many DLT networks have been developed in isolation for specific use cases. Key differences include data records (on-blockchain or off-chain), data structure and transaction protocols, consensus algorithms and data distribution and distributed applications i.e., smart contracts.
The paper points out there are two models of interoperability. The first is a trusted third-party model, where network members choose a third party to validate transactions or information – usually off-the blockchain.
The second is a direct link model which leverages technical arrangements such as smart contracts or atomic swaps to ensure interoperability directly on-chain and between-chain. However, this is more complex and resource intensive.
Interoperability is only one component. In parallel, the ECB recommends a consolidated approach based on regulatory licences and conduct of business rules to ensure a sound governance of security post-trade services. This would create incentives for the wide-scale adoption of DLT.
The report categorises securities issuance and post-trade processes into models depending on how DLT is deployed in each case. It looks at the implications for the use of DLT at different stages of the securities life cycle, from issuance to custody and settlement.
Although the ECB paper focuses on post trade, there are hundreds of DLT solutions looking at tokenised securities, many of which are not purely post-trade but cover the entire life cycle, including issuance, trading and post-trade.
©Markets Media Europe
[divider_to_top]
