In the current fast-changing environment, the adoption of solutions based on distributed ledger technology (DLT) could bring both opportunities and challenges for the financial ecosystem and its stakeholders.
Various institutional actors, such as governments and central banks, are actively undertaking initiatives to investigate and develop potential DLT-based use cases. In addition, market players are experimenting increasingly with the technology, despite the current lack of common practices and standards. While the diverse nature of the initiatives is likely to result in a wide range of different findings and is part of a competitive mechanism in the initial phase of a new technology, it also entails the risk of market fragmentation and potentially of a delay in progressing towards a capital markets union1.
Market changes prompted the advisory groups on market infrastructures (AMIs) to carry out an analysis. To this end, the Fintech Task Force (Fintech-TF) was established, made up of stakeholders from the European post-trade industry. Over the last three years the Fintech-TF (continuing the work of the former Task Force on Distributed Ledger Technology, DLT-TF) has carried out an initial assessment of the potential impact of the use of DLT in a post-trade environment2. It has subsequently identifiedpossibleusecases3 tosupportthepotentialdevelopmentofshared standards for interoperability in the post-trade area.
The present report has been prepared also on the basis of previous work carried out by the AMIs. It is part of the efforts to monitor the potential impact of financial innovation on securities post-trade processes. The report seeks to establish a common understanding among European stakeholders of the progress that the industry has made to date in implementing DLT in line with the current regulatory system.
Focusing on current use cases for equities and bonds, the report describes different types of securities issuance and post-trade processes. These are categorised according to different “models” depending on how DLT is used in each instance. The report also assesses the implications of using DLT on the basis of identified market practices.
The report concludes that the adoption of DLT-based solutions could be driven by projected cost savings and efficiency gains. Nevertheless, the use of DLT would entail similar challenges to those faced by solutions relying on conventional technology (such as fragmentation and interoperability issues) and would potentially create new ones (for instance relating to the legal validity of tokens). Additional costs and barriers – alongside the existing hurdles – should be avoided when adopting DLT-based solutions.
To mitigate risks of fragmentation and interoperability, a first step is to identify a common technology-neutral taxonomy aimed at enhancing clarity also in terms of the regulatory framework. Consideration should then be given to specific DLT features, to the extent that they may also change the dynamics of current functions, as related life-cycle activities and tasks might be managed on or off the network and aggregated into “smart contracts”.
In addition, DLT-based solutions should be underpinned by strong governance, with interests aligned and properly monitored. This would, for instance, provide an incentive for the wide-scale adoption of the innovative technology while ensuring safety and common rules. Market standards have a critical role to play. In the same way as for incumbent systems, interoperability remains critical in a DLT environment both for (i) migrating efficiently from an incumbent system to a DLT-based system and (ii) connecting DLT-based systems and incumbent systems on an ongoing basis.
The report is structured as follows. Chapter 1 outlines regulatory, governance and interoperability aspects identified in the context of DLT-based solutions. It also outlines key elements in the regulatory framework, defines potential new functions in the DLT environment and explains the concept of interoperability used in the report. Chapter 2 describes two DLT models and their key functionalities. Chapter 3 addresses the key implications of using DLT at different stages of the securities life cycle, from issuance to custody and settlement.
Examples identified in the market are presented in the annexes. Annex 1 illustrates the models by highlighting the key components of specific solutions being implemented in the market, while Annex 2 describes key examples of how interoperability can be ensured in DLT-based solutions.
The full report is available at https://www.ecb.europa.eu/pub/pdf/other/ecb.20210412_useofdltposttradeprocesses~958e3af1c8.en.pdf