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“Distributed ledger technology” (DLT)[1] is creating a rapidly rising tide of discussion about its technical feasibility, now followed by debate on its potential applications to wholesale financial markets. But soon the technical novelty will collide with the harsh world of regulation. Could it turn into the technological equivalent of a “sub-prime mortgage”? Will society take that risk?
As an example, SWIFT has an interest flowing directly from its role as the secure messaging service for the world’s payments, and increasingly in settlement - epitomised by their recent article “In principle, distributed ledger technologies and smart contracts could lift levels of automation in post-trade processing to new levels by reducing the amount of information that has to be exchanged to settle a transaction, and potentially the number of parties involved as well. The realisation of these benefits depends on standardisation, and ISO 20022 provides the ideal foundation on which to build a viable transition from current to future technologies.”
As SWIFT put it, “Some argue that it hails the end of securities market infrastructures, others that there will be no revolution, just a natural evolution of what already exists….” SWIFT went on to say that its “focus is on building technical, operational and business capabilities with a view to evolving our platform such that DLT-based services could be offered to our 11,000+ members, when the technology matures and firm business use cases emerge. Such DLT-based services could be provided by SWIFT, our community or third parties.”
Coming from the global leader, this means the technology could move very fast. Moreover, the regulatory community is rapidly waking up to DLT. ESMA began analysing virtual currencies in 2013 and, in April 2015, published a call for evidence on investments using virtual currencies or the distributed ledger technology (‘DLT’). However, the results showed that investments using virtual currencies as underlying assets for products remained marginal. However, ESMA continued to keep a watchful eye on the potential benefits and risks that the DLT could bring when applied to securities markets - but from a public policy perspective, rather than technological enthusiasm. [...]
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