A recent research report by the World Economic Forum (WEF) has found that Distributed Ledger Technology has significant potential for market transformation, but simultaneously found that capital markets can’t come to an agreement on its best form of application. Traderoot explains what DLT is, and how they believe it can best benefit capital markets.
What is Distributed Ledger Technology (DLT)?
DLT is a decentralised database/digital system which is shared and simultaneously synchronised across multiple locations or among various users or institutions.
Unlike traditional databases, which use centralised servers, distributed ledgers are managed by multiple participants and have no central authority, making them less prone to cyber-attacks and fraudulent activities. Furthermore, a distributed ledger also creates a fixed database, meaning that once the transaction or information has been recorded, it cannot be deleted. Any updates are permanently recorded. This high level of transparency creates trust among the participants as all other participants can see who is using and modifying the ledger.
Interest in distributed ledger technology has grown significantly over the past decade, partially because of the widespread publicity of Bitcoin, a cryptocurrency which first introduced blockchain technology. People often confuse DLT for blockchain technology even though they technically are not synonymous. Blockchain technology is simply a form of DLT.
DLT in Capital Markets
The recent research report by the World Economic Forum details the various opportunities and use cases for each asset class or product line including Equity Markets, Debt Markets, Securitised Products, Derivatives, Securities Financing, and Asset Management. DLT offers the potential for mutualised infrastructure for efficiently managing shared data and workflows, based on three interrelated technical capabilities:
Trusted shareable data
DLT provides for multiple parties to have identical, immutable and synchronised ‘copies’ of a shared ledger, which eliminates the need for each party to maintain its own data silo. Data consensus eliminates the need for manual reconciliations, minimises disputes and increases data sharing, accuracy and transparency across the ecosystem.
With DLT, financial instruments can be established as a digital token, with the token serving as either a representation of the asset or as the asset itself. The custody of the token’s cryptographic key proves ownership, similar to the custody of a physical bearer’s stock certificate. Tokenisation offers various benefits which include faster and lower-cost asset transfers, fractionalised securities and increased liquidity for niche markets. Digital asset exchange Binance recently launched Coinbase and Tesla tokens which are reportedly backed by the actual stock.
Smart contracts define market rules and terms of an individual security, which creates the possibility for a seamless, automated execution of operations among multiple users without the need for manual intervention. Smart contracts enable fast and reliable transaction processing, reducing costs and risk in transaction settlement.
Distributed Ledger Technology has great potential to revolutionise the way capital markets work. DLT applied to capital markets will allow entities to provide clients with a faster, cheaper and more transparent product or service. DLT is slowly moving from experimentation to commercialisation across a variety of asset classes, value chains and jurisdictions. Most market participants are, however, still far from adopting this technology at the scale required to see a drastic influence, but this does not mean the adoption isn’t there, as revealed by the WEF report.
If you would like to discover more around DLT and its potential benefit for your operation, speak with the Traderoot team and let’s set up a consultation.