Interoperability and privacy issues hold back DLT adoption in capital markets

Distributed ledger technology (DLT) has the potential to enhance and reorder the infrastructure of capital markets to create greater efficiency, reduce costs and lower risks. But key challenges around interoperability, privacy and regulation, remain to be addressed before the mass adoption of these new solutions, experts told the audience at last week’s Hong Kong FinTech Week.

Speaking on a panel titled, ‘Embracing Innovation in Capital Markets’ which was moderated by FinanceAsia, Vivien Khoo, chair and co-founder of industry association for virtual assets, Asia Crypto Alliance, said that DLT can help provide a single source of truth, allowing players in the industry to cut across existing market structures and boundaries.

DLT has been hailed for its ability to also transform clearing, settlement and reporting for securities and derivatives markets. Having a centralised ledger eliminates the need for internal reconciliation, enhances efficiency and gives users and regulators access to real-time data.

Coupled with tokenisation – that is, the use of virtual tokens to represent legal title of financial assets –there is room for DLT to act as a venue for trading, and not just settlement.

However, there are a few areas in which the adoption of DLT and tokenisation “hits a wall” – namely, when it comes to interoperability and privacy, noted Shane Akeroyd, president at technology and software provider, Digital Asset.

Felix Yip, global head of Digital Assets Engineering at Goldman Sachs, added that the issue of interoperability needs to be addressed not just across different DLT networks and platforms, but also between traditional and digital forms of market infrastructure. The institution is working with Digital Asset to develop its tokenised asset infrastructure.

“A lot of it is driven by client demand. We are seeing growing interest from issuers, investors and other market participants on using these new technologies to address frictions in their traditional rails, or to enjoy some of the benefits brought about by transparency, efficiency in settlement and post-trade processes,” Yip explained.

Other banks which have ventured into this space include JP Morgan, with its blockchain network, Onyx.

However, it is not only banks that are looking into tokenisation – stock exchanges are exploring how they can leverage DLT to upgrade or – in the case of the Australian Stock Exchange (ASX) – replace existing infrastructure.

Digital Asset is working with the ASX on a project to replace its existing Clearing House Electronic Subregister System (CHESS) with a DLT-backed platform, as well as with the Hong Kong Exchanges and Clearing Market (HKEX) on the so-called “Project Synapse” which aims to connect Hong Kong and Western markets with mainland China.

“The benefits of tokenisation really accrue when you’re serving a big network, and the exchanges are probably at the heart of most of the financial markets networks,” said Akeroyd.

“We’re also speaking to a number of exchanges – including those in Asia, to tokenise corporate actions… Watch this space,” he added.

Finally, the panellists discussed the possibility of the disintermediation of traditional players, such as banks and stock exchanges, through the adoption of new technologies.

There will always be a need for security services and network players, the panellists agreed. But with the latest innovations, their role may look different, suggested Akeroyd.

FinTech Week concluded on November 2.