This is a guest opinion post from Horace Barakat since broadridgewhere he is Head of Digital Innovation for Capital Markets.
A market crash and the implosion of FTX might have dampened investor enthusiasm for crypto in 2022, but industry misfortunes haven’t slowed efforts to transform capital markets through distributed ledger technology (DLT). ).
A large number of banks, exchanges, technology companies, and industry consortia are developing viable use cases for DLT in the capital markets. Today, DLT solutions are operating in companies captivitysecuritized loans, Private capital, repositoryand other markets.
The advancement of these platforms from proof of concept to commercialized products is encouraging more market participants and technology providers to join existing DLT initiatives or launch projects of their own. For the past three years, I have headed Broadridge Distributed Ledger Repo (DLR) Solutionthe company’s largest DLT venture to date.
DLR has been fully operational for over a year, with several onboarding clients and transactions of over $50 billion in average daily volume. Based on that experience, I would offer the following recommendations to companies currently planning or managing a DLT capital markets development project:
Aim for a big change
Identify an area of the market where the application of DLT can generate benefits at scale, rather than incremental improvements. Find a segment where the unique features of DLT can create a step change in efficiency, liquidity or cost minimization.
Fixed income markets offer an excellent example of DLT in action. The technology makes it easy to take advantage of smart contract technology, which can help digitize and mutualise workflows between counterparties, or execute corporate actions such as bond coupon payments and principal repayments. Tokenization can improve the speed and liquidity of securities, reduce settlement times, and lower costs over the security’s lifecycle. Companies should consider addressing the most difficult pain points in the industry and within their organizations with specific DLT capabilities, such as smart contracts and tokenization, when evaluating DLT initiatives.
narrow your focus
DLT could one day transform the entire fixed income market. However, trying to orchestrate change at that level early on is a recipe for failure.
Implementing a completely new technology is challenging, even in a limited use case. This becomes even more complex if the deployment requires cooperation between many different market participants. Regardless of the market, start with controlled use cases that can deliver real benefits for participants within a business or function that is largely self-contained and presents few barriers to adoption.
Deliver benefits quickly
Find opportunities to provide immediate benefits to participants. In the capital markets, the benefit of a DLT solution rests on the ability to develop a significant network effect. Even the most effective DLT demos can fail if they don’t create enough scale of participants. For that reason, developers should initially focus on use cases that have the potential to produce immediate tangible benefits with low risk to incentivize customers to join.
This is the strategy we followed at Broadridge when we developed DLR. In many ways, the repository is the ideal marketplace for DLT. It is largely self-contained and features the kind of complex, multi-part workflows that DLT was designed for. Our clients immediately recognized that the DLR platform would increase collateral liquidity, lower costs, reduce risk and shorten the settlement cycle. These benefits helped attract major banks and other large players in the repo market early in the process, providing the momentum the platform needed to grow and succeed.
Companies need to embark on DLT projects with a realistic understanding of the challenges they face. DLT is becoming a mainstream technology and will profoundly transform capital markets, but we are still in the early stages of that process as standards are formed around technologies, protocols, and rules. Despite these risks, and regardless of any cryptocurrency drama, I strongly believe that these early days of DLT represent a once-in-a-generation opportunity for companies able to select the right application and execute DLT development projects effectively on capital markets. .