DLT in Capital Markets: A Strategic Assessment of Opportunities and Risks – A Report by the Global Financial Markets Association

The Global Financial Markets Association (GFMA) has released a comprehensive report examining the opportunities and challenges presented by Distributed Ledger Technology (DLT), including DLT-based Securities and associated activities across the securities lifecycle.

The report, developed in collaboration with GFMA member firms, incorporates the insights of industry practitioners at the forefront of DLT use cases research and application worldwide.

The report indicates that innovation in distributed computing and data encryption, embodied in DLT and the emerging digital asset ecosystem, could have a fundamental impact on the next major wave of capital market developments. The technology is seen as a potential catalyst for operational efficiency, cost savings, product innovation, broader market access, and new liquidity pools.

The current focus is ensuring that DLT applications meet regulatory requirements and mitigate any potential risks associated with the use of this new technology. Several jurisdictions are introducing sandboxes or pilot regimes to facilitate firms’ experimentation with and issuance of DLT-based products. Live use cases in capital markets, profiled in the report, are already beginning to capitalize on opportunities and deliver benefits to clients while remaining compliant with existing rules and regulations.

The emergence of DLT and the digital asset ecosystem represents a critical juncture. As regulators worldwide formulate policy to govern the ecosystem, it is crucial to ensure stability and protections for market participants in digital asset markets. The report aims to guide policymakers and market participants in identifying regulatory, supervisory, and risk management practices that not only offer stability and protections but also permit the industry and economy to leverage the benefits of DLT.

Despite the growing momentum behind DLT use cases, there is yet to be widespread adoption of DLT-based Securities. DLT-based issuances have been largely experimental, and liquidity in Primary and Secondary Markets remains significantly below the levels expected in the long term. The report warns that siloed approaches and diverging regulatory regimes could hinder progress towards a broader, coordinated DLT-based ecosystem.

To foster confidence among industry participants, the GFMA underscores the need for cross-industry consensus. This consensus should aim to promote development around specific use cases and encourage stakeholders to proactively shape the emerging ecosystem in its foundational phase of development. In response, the GFMA and its members have proposed five calls to action to overcome existing adoption barriers and further the development of DLT-based capital markets. These calls to action are targeted at industry participants and regulators alike.