Regulatory impediments and the current fragmentation of protocols from a multiplicty of providers of distributed ledger technology will prove to be a major challenge for banks to overcome before the technology can go mainstream in financial markets, says a senior Deutsche Börse executive.
Writing in a report for the World Federation of Exchanges, Deutsche Börse’s Stefan Teis, SVP, business & product development says real-life applications of DLT in the financial sector will not become more widespread until regulators are convinced that the technology can be made compliant with the existing regulatory framework.
"Many blockchain features are at odds with existing regulation," he points out. "A simple example is client anonymity which is diametrically opposed to the tightened transparency requirements demanded by regulators in recent years (e.g. in the area of taxation, Know Your Customer, compliance, etc.). This essentially eliminates the use of a public distributed ledger construct for the financial industry."
Deutsche Börse, like many other market infrastructure providers, has had a dedicated team exploring potential applications of blockchain-based services for the past two years. The exchange operator is currently running three separate tests of the technology both internally and collaboratively with third party partners.
These include a partnership with Deutsche Bundesbank to test the settlement of securities in delivery-versus-payment mode for centrally-issued digital coins, as well as the pure transfer of either digital coins or digital securities alone; CollCo, which investigates the P2P transfer of commercial bank money using a virtual currency, and; a global initiative in collaboration with central securities depositories in Canada, Norway and South Africa, to facilitate cross-border movement and provision of securities collateral.
"Fundamentally we believe that in order for the technology to have widespread adoption we need three foundational pillars," says Teis. "One is the ability to access central bank liquidity on DLT; two is to access commercial bank liquidity on DLT; and three is to be able to conduct multijurisdictional transfer of securities on a single DLT platform."
Teis accepts that DLT is here to stay for the long-term due to its "indisputable benefits".
But there is a long road to travel: "Prior to widespread application in the financial sector, the technology has to advance and a greater level of technological standardisation has to be achieved. There current fragmentation of protocols and providers will prove to be a challenge. Implementation also needs understanding, recognition, and approval by regulators which will evolve over time."