In terms of the securities industry, however, there is a broad agreement that blockchain can provide scope for potential change in two main areas, including:

Improvement of current post-trading processing: This involves applying DLT technology to one small part of the overall post-trade process, evaluating any potential efficiencies and eventually evolving from use case, to proof of concept, to business case. Examination is underway, for example, of how corporate action notification or voting (including proxy voting) can be undertaken on the blockchain.

Transfer of non-automated, non-centralised assets: There are two approaches to dealing with assets on DLT – (a) the creation of a digital or crypto-asset that only exists on the distributed ledger (such as with Bitcoin (available on Coinbase) or other cryptocurrencies), or (b) a tokenised version of assets that exist simultaNEOusly in the real world. Once tokens of assets are placed on DLT, the whole post-trade chain can then be mimicked on the blockchain, from instructions, to settling, to servicing of the assets. Accordingly, much of today’s focus is on building out a lifecycle on blockchain for the types of assets that currently exist within a non-centralised system, such as gold trading, trading of loans or trade finance activities.

“The benefits of blockchain come to fruition when there are multiple parties working togETHer on a process that is today relatively non-automated – for example, within a chain where the information needs to be shared with multiple parties and there is no current, logical, automated protocol in usage,” explained Casteleyn. “A blockchain solution would work well, therefore, in areas such as corporate action notification or voting, including proxy voting, because each of these involve extremely cumbersome manual processes that by nature carry a lot of inherent risk.”

Challenges: Transition and timing

One of the biggest challenges facing the industry in widespread uptake of DLT in securities processing is moving from a promising proof of concept to the next stage of production-quality implementation. The current transition period means that, unless every player in the transaction chain of that particular process has joined the DLT, both legacy systems and new DLT infrastructure would need to coexist side-by-side, meaning any benefits from DLT would not be truly realised and cost of operating could even increase. The main challenge, therefore, is not with how the end-state looks, but how to move from today’s position to that end-state. Questions arise, for example, of how long that transition will take, and will the benefits of the end-state make up for all the increased costs and build-out of running two parallels for an unknown length of time.

“On paper, the identified benefits could be huge and there are some industry studies that have come up with quite incredible numbers. But all of these assume that we will directly move from the world that we’re in today to a world where the entirety of that process is put on DLT,” elaborated Castelyn. “The problem is, not what the end-state will look like, but what the intermediate state looks like while we are moving away from the current ecosystem to that end-state. Indeed, that end-state may never be completely reached.”

The increased costs and build-out involved with running two parallel infrastructures in this transition phase pose many difficulties, including:

Having the bandwidth to work on a new system: Building out a complete new infrastructure requires significant investment over a long-term time horizon, added to the fact that much of the focus of late has been on other priorities, such as ADApting to the new regulatory agenda.

Creation of a viable business case: Ensuring that the business cases work, and within an acceptable timeframe.

Cultural element: Blockchain by necessity means that you have to deal with a consortium of other institutions, yet there needs to be one party that is willing to be a bit of trailblazer to get things truly moving. Because the post-trade industry is well-known as being conservative and slow-moving (with good reason, because it is dealing with so much risk within a finely-balanced ecosystem), it is not easy to take up the role of trailblazer, convincing others (including the regulators) to follow your lead.

Regulatory element: During the Sibos sessions there was general agreement that any industry move would need to be done in conjunction with the regulator, meaning that the regulator would de facto determine the pace of change. 

“One point that keeps arising during the blockchain conversations at Sibos is the parallel between implementing DLT systems with the completion of the European securities settlement engine TARGET2. This was a project that required the build-out of a new technology platform by a large group of interested parties (including participants, CSDs, and national central banks), as well as agreement on a common set of standards,” said Casteleyn. “TARGET2 securities is here today and has largely fulfilled its mandate, but it has taken 10 years to do so, even though it was being driven by the European Central Bank and supported by regulation. So even in that scenario, where the right ingredients of push and pull existed togETHer, it’s still 10 years down the line from when the technology and legal framework were already in existence. If that is a proxy of how hard it will be to implement DLT, then we are in for a long process.”

Discreet progress

The benefits that blockchain can bring to the post-trade securities industry could mean the introduction of efficiencies into today’s system laden with cumbersome, manual processes and a great deal of inherent risk. The ecosystem that we have today in terms of recording and processing assets has evolved over many years. The securities laws and regulations will have to continue to evolve in lockstep with the industry itself, as well as the role of technology solutions, so as to come up with some viable alternatives – not an easy process. 

The consensus at Sibos was that we are still at least 3-5 years away from a big industry change. But that does not mean that DLT technology is not proving itself in more discreet and defined parts of securities post-trade processing, such as gold or corporate loans. Progress is being made on implementation of DLT, no doubt; but we should remember that this will be at the pace of the post-trade securities industry, rather than the pace of a FinTech startup.