Digital Assets, Distributed Ledger

Technology and the Future of

Capital Markets
INSIGHT REPORT
M AY 2 0 21
Contents
3 Foreword

4 Context

5 Introduction

7 Key insights

14 1. Background

15 Business and technology developments in capital markets

17 Overview of DLT in the capital markets context
24 Timeline of major technical, regulatory and business developments

26 2. DLT and digital assets in capital markets

27 Spectrum of future scenarios

28 DLT-related considerations for different capital markets actors
29 Framework for different approaches to DLT solutions

32 3. Use case analysis by asset class/product line

35 Equity markets
46 Debt markets
56 Securitized products
64 Derivatives
72 Securities financing
79 Asset management/fund administration
84 Enablement use cases Cover: GETTY/Piranka
Inside: all GETTY/Poganka06, MicroStockHub, DKosig,
87 Conclusion Tetiana Lazunova, MicrovOne, Maxger, Enjoynz, Filo, Maxger,
AF-studio, Filo, Koto Feja
91 Contributors
© 2021 World Economic Forum. All rights reserved. No part of this
94 Acknowledgements publication may be reproduced or transmitted in any form or by any
means, including photocopying and recording, or by any information
96 Endnotes storage and retrieval system.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 2
Foreword
Roy Choudhury Ben Weisman
Managing Director Initiative Lead,
and Partner Financial Innovation
Boston Consulting Group World Economic Forum

In recent years, the financial institutions comprising Since the World Economic Forum published The Future
the capital markets have begun to approach digital of Financial Infrastructure in 2016, we have seen relatively
transformation with a level of urgency previously seen little of the blockchain-enabled transformation explored in
only in consumer-facing financial services. The need to the report. Yet we are potentially approaching an inflection
improve client service delivery, achieve greater efficiency point, with meaningful DLT use cases going live and many
and enable new services (e.g. through monetization institutions acknowledging that this technology will likely
of data) have converged on imperatives for all capital play some role in the future of capital markets. This report
markets executives to explore how technology should be explores the various ways in which this technology is
used to redesign product offerings and operations. starting to be used, as well as the challenges involved in
attempting industry-wide transformation.
At the same time, distributed ledger technology (DLT),
of which blockchain is the most widely known example, Consistent with the World Economic Forum’s
has gone through several pendulum swings in terms multistakeholder approach, the insights presented here
of industry and public interest. Depending on one’s are based on dialogues and interviews with expert
perspective, this technology could disintermediate the practitioners from across the capital markets ecosystem.
capital markets as we know them, radically simplify We thank all who participated in this initiative and shaped
operations for leading capital markets players, help our understanding of this space.
expand access to markets for small businesses and retail
investors or fade into irrelevance.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 3
Context
Distributed ledger technology (DLT)* has existed for more than a decade. For nearly
as long, advocates have argued either that this technology could be used by financial
institutions to radically simplify operations or that its decentralized capabilities would
enable an entirely new financial system, wherein capital could flow without traditional What use cases Which DLT use
intermediaries. DLT’s detractors – perhaps just as numerous – have pointed out challenges have been cases are gaining
in both of these visions, stemming from the potential costs of transformation, the capital
markets’ reliance on relationships of trust and the existence of other technologies that developed across traction, in which
might be better suited for certain uses. In this context, firms have invested heavily in DLT asset classes, jurisdictions
efforts, with a wide range of strategic motivations.
and how are they and why?
Over the past two to three years, several regulators have expressed greater comfort being adopted?
with this technology, and some DLT-enabled products and services have moved from
exploration and experimentation to commercialization. It has become clear that, at a
market-wide level, DLT offers the potential for significant transformation. This report
explores what has been learned from these efforts. While ultimately neutral as to what
the capital markets of the future will look like – and what role or roles will be played by
DLT – it aims to provide capital markets executives and regulators with the strategic What are the How are industry
insights needed to understand the current state of use-case developments and
potential future scenarios.
impediments to dynamics –
adoption, and what collaboration and
has been learned competition –
as a result? shaping adoption
and demand?

*This paper uses the term “DLT “to refer to distributed ledger technology and blockchain.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 4
Introduction
Over the past year, financial services and technology experts were engaged in
a series of global workshops and expert interviews

Global workshops*
Eight workshops were conducted over the course of 2020 – all virtually. These brought
together executives from banks, asset managers, exchanges and infrastructure providers,
financial technology companies and regulators for a series of interactive discussions. Three
workshops were focused on developments from a regional perspective (North America,
Europe and Asia-Pacific), while five were focused on emerging uses of DLT within specific
asset classes or product lines (equities, debt, securitized products, derivatives and
securities financing, and asset management).
BIS

Expert interviews*
In-depth interviews were conducted with almost 200 executives from leading financial
services and financial technology firms, as well as with experts from outside the industry.
Liquid Mortgage

Survey*
More than 60 firms participated in an anonymized survey focused on details of DLT use
cases that their firms are developing. While not a scientific sampling, this survey enabled
the team to effectively map out where DLT experiments are being conducted within the
capital markets. Annual Report ©2007 Infosys Technologies Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change
without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

2017/18

The inclusion of company case studies within this report does not reflect
an endorsement of the company or its products and services by the
World Economic Forum.
*Please see Acknowledgements for a list of individuals who participated in workshops and interviews.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 5
INTRODUCTION

This report will provide executives, regulators and

policy-makers with insights on the emerging uses of
DLT in capital markets

This report will… This report will not…

– Explore many of the ways in which capital markets – Focus on DLT-related use cases outside the capital
institutions and technology firms are experimenting markets, including payments, digital currencies,
with or building products enabled by distributed lending, working capital solutions and trade finance
ledger technology (except as they relate to specific capital markets
use cases)
– Illustrate how individual DLT use cases may address
challenges or inefficiencies in specific markets – Explore cryptocurrencies, non-fungible tokens (NFTs)
or decentralized finance (DeFi) applications
– Share insights from relevant experts on potential paths
forward, challenges or enablers for these use cases – Provide detailed technical explanations of financial,
operational or technological dimensions of use cases
– Highlight examples of firms bringing specific use
cases to market, with summary details on each – Evaluate use cases or make recommendations on
strategies that individual institutions should pursue

This report seeks to help…

– Strategic decision-makers at financial institutions to understand the potential roles DLT is beginning to
play in the capital markets, critically assess different use cases and explore how their institution might
operate within different future state visions

– Regulators and policy-makers to understand how financial institutions in different jurisdictions are
adopting DLT-enabled solutions so that they may craft responses that appropriately balance innovation
and market safeguards

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 6
Key insights
DLT is beginning to reshape capital
markets, but the future is uncertain

1 2 3 4 5
Market forces, supported The underlying challenges After years of While most emerging While greater digitization
by regulatory and that DLT is trying to solve in experimentation, many DLT DLT use cases are being is inevitable, substantial
technical developments, capital markets are real and and smart contract use developed collaboratively, headwinds may continue
are pushing participants substantial. Inefficiencies vary cases in capital markets are there is no industry-wide to limit adoption of DLT
in capital markets to by asset class and jurisdiction, live across jurisdictions. Market vision of the future in most solutions, including limited
digitize and consider the but legacy processes and participants are launching jurisdictions – due in part leadership buy-in and uncertain
use of distributed ledger technology systems have solutions designed to improve to substantial competing business cases, the need
technology (DLT). Key trends created complexity, opacity existing processes for defined incentives and the risk of for significant restructuring
include growing institutional and fragmentation across ecosystems in numerous asset value migration across of business operations,
and regulatory comfort with markets, which likely has a classes and in some cases market participants – challenges relating to bridging
blockchain technology, the meaningful impact on costs, are reimagining value chains potentially limiting the ability legacy systems with new
potential for central bank market liquidity and firms’ as we know them today. to scale up many solutions. solutions, and perceptions
digital currencies (CBDCs) balance sheet capacity. However, grand visions of about regulatory uncertainty.
in several jurisdictions, and While DLT is not necessarily disintermediation or total
commercial dynamics, such the optimal technology digital transformation at
as cost pressures and client option for every proposed scale are still far from
service expectations. use case, experiments being realized.
are proving its viability
in addressing significant
operational inefficiencies
and increasingly improving
balance sheet management.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 7
KEY INSIGHTS

1. Significant tailwinds may support adoption

of DLT solutions in capital markets

Mutually reinforcing developments supporting financial

institutions’ exploration of DLT… …are intersecting with broad capital market trends

Market Policy Technical

Increased competition, including the rise of digital disrupters challenging the roles
developments developments developments
of traditional intermediaries and service providers

Growing retail and Growing regulatory Technical Emergence of a bifurcated client service model, with a focus on digitization and
institutional investor comfort with DLT advancements in DLT/ simplification for all client types
interest in digital across several blockchain: growing
assets, most notably jurisdictions maturity, platform
cryptocurrencies consolidation and Balance sheet capacity continuing to be a major constraint
improvements in
interoperability
Acceleration of digital adoption due to COVID-19 pandemic

Developments in Serious exploration of Institutional-grade Sustained cost pressures across the value chain
adjacent markets, CBDCs in numerous infrastructure in digital
including stablecoins jurisdictions, including asset markets
and DLT-based some based on DLT
trade finance and
payment solutions

Across the capital markets ecosystem, broad trends are accelerating the digital push

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 8
KEY INSIGHTS

2. DLT may be able to address significant

challenges across the capital markets

The scale and nature of inefficiencies

varies across markets, but legacy
structures tend to: DLT is proving well-suited for addressing operational inefficiencies, and is
– Require firms to independently maintain siloed
increasingly demonstrating the possibility of better resource management
records of transactions, securities and other data, across firms and markets:
with each institution independently processing
events and subsequently reconciling records. This
adds complexity to operations, increases the
risk of error, limits the ability to automate
DLT Create trust in a real- Automate and Enable assets to be
processes and likely adds costs across the
capability time, shared source of synchronize business more efficiently and
capital markets ecosystem
truth across multiple processes across flexibly transferred
parties in a market entities using across entities
– Limit the flexibility of transaction windows and
or transaction smart contracts
time frames in order to accommodate the need for
sequential processing and verification. While many
highlight the costs of liquidity needed to fund multi-
day trade settlement cycles, this dynamic also limits
the ability to optimize balance sheets, as firms are
unable to rapidly move securities and cash to address
funding and liquidity needs and availability
Business Minimize the need Reduce manual Unlock liquidity
benefit for reconciliations interventions, risk and and enable better
and manual data cost across processes balance sheet
verifications management across
and between firms

DLT use Mortgage-backed Derivatives post-trade Intraday repo using

case securities with life-cycle management tokenized collateral and
example underlying loan data platforms digital cash
recorded on DLT

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 9
KEY INSIGHTS

3. DLT applications are going live across

the capital markets

After years of experimentation, financial institutions and technology providers have begun
to launch DLT-based products and projects. While capital markets are not necessarily
moving inexorably towards a global, fully digitized, DLT-based utopia as many predicted,
DLT-enabled use cases are becoming a reality across a range of asset classes, business
cases and ecosystems.

Examples of use cases gaining traction (as of April 2021)

Proof of concept Launch scheduled Live in production

Soon
Major market Soon Live
infrastructure Bilateral/ Live Securitization
replatforming intracompany Corporate bond of blockchain-
using DLT repo issuances originated loans
Live
Intraday
repo Live
Corporate bond Soon Private equity
origination workflow End-to-end digital market tokens issued
infrastructure from major on blockchain
Public fund distribution infrastructure provider

Public fund administration

Soon
Soon Cross-border Live
Equity/credit derivatives collateral mobility Private fund
life-cycle management administration
and distribution

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 10
KEY INSIGHTS

4. Strategic considerations are driving

divergent visions of the future

Institutions are deciding where to invest across a range of But as different players embark on varying strategies, these
strategic choices, including: choices are creating tensions:

Digital product strategy Redistribution of value pools and the “collaboration paradox”

1. Market selection: focus on developing solutions for individual asset classes or DLT-enabled transformation could make the industry more efficient,
develop an asset-class agnostic infrastructure solution but it would likely shift value pools among both incumbent firms and
new entrants. Given the potential for new business opportunities and
2. Value chain breadth: focus on addressing challenges in one slice of the value the possible disintermediation of some existing roles – a conceivable
chain or build an end-to-end solution reality as regulations adapt to DLT – firms may be increasingly reluctant
to participate in collaborative initiatives. Without collaboration, however,
3. Degree of change: attempt to improve existing processes or fundamentally disrupt ecosystem-wide value will be difficult to achieve.
the market as it exists today

4. Technology fit: identify whether DLT is the most appropriate technology for a A complex patchwork of initiatives, spanning different institutions,
specific set of challenges and how it will be used business lines and geographies, limiting the ability to reach scale

Since many DLT-based initiatives would independently require a

Go-to-market strategy substantial level of transformation, institutions’ focus on a limited set
of initiatives or consortia – which makes sense from the perspective
1. Commercial and technical approach: attempt to build a new ecosystem, work of any individual firm – can prevent the cross-institution alignment
with an existing set of partners or another approach needed for many use cases. Similarly, while regulations can help
define the guardrails for innovation, in some cases, vastly different
2. Transformation management: determine whether to build a new system and regulatory frameworks have led to very different technology needs in
migrate all participants or build and operate in parallel different markets.

3. Interoperability: determine whether and how solutions will integrate with other
platforms and systems, technically and commercially Short-term vs. long-term strategies

While achieving short-term objectives will build comfort with the

technology, it may, counter-intuitively, inhibit the appetite for large-
scale transformation. Given the long pathway to transforming entire
markets, lack of buy-in for long-term solutions may limit the upfront
investment needed.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 11
KEY INSIGHTS

5. Challenges to DLT adoption

remain substantial

Business case and Bridging the old “Chicken and egg” Coordination Regulatory and
leadership buy-in with the new dilemmas challenges legal uncertainty
combined with
Many DLT projects are Maintaining legacy systems For most use cases, achieving limited risk Without a clear playbook
focused on achieving a while building and scaling scale may be more challenging for regulatory compliance
long-term (i.e. five-plus new solutions is likely to be than reaching production.
appetites and generally agreed-upon
years) value proposition but costly and complex. While Except for completely internal principles for the legal
require substantial upfront common technical and financial systems, all use cases will In many cases, realizing standing of DLT-enabled
investment and industry-wide standards are essential for require a “minimum-viable the anticipated benefits of transactions and securities,
transformation in the short many DLT use cases, they ecosystem” of participants DLT will require significant market participants are unlikely
term. Where the business case may also prove essential (e.g. at least one of each of the restructuring of roles, to make the substantial
is long-term, projects must for enabling interoperability relevant parties for a certain processes and operations, investments required to
be championed by leaders between legacy systems type of transaction). However, potentially introducing new fundamentally change
with the authority to influence and DLT-based solutions. some DLT solutions will create risks as markets adjust. While processes. Further, regulation
industry-wide alignment in Nevertheless, institutions and new markets that will exist in industry consortia have tackled varies across jurisdictions,
order to move forward. Where markets attempting parallel parallel to traditional markets. large-scale challenges and complicating global solutions.
the business case is unclear (DLT and legacy) infrastructures With neither an active investor transformations before, the While many regulators have
or the technology is not will have to effectively manage base nor an active issuer base, appetite for system-wide expressed openness to DLT-
necessarily fit-for-purpose, costs and risks. these parallel markets may change remains limited based innovation, a perception
leaders should consider not have a clear path to without a “burning platform” remains that the future path is
whether these projects are liquidity, thereby limiting the for change. unclear, particularly as most
diverting energy from other willingness of investors to new entrants have not yet
worthwhile digitization efforts. participate or issuers to issue faced prudential regulation.
in these markets.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 12
KEY INSIGHTS

Summary

Securitized products
– End-to-end origination, securitization and
servicing platform
– Tokenizing loans for servicing and data management
– Facilitating security servicing on DLT

Debt markets Derivatives

– Platform for digital bond issuance – Platform for OTC derivatives post-trade life cycle
– Distributed order book for bond trading – Replatforming existing infrastructure on DLT
– Platform covering full corporate bond life cycle – Platform managing collateral for cleared derivatives
– Retail bond issuance and distribution – Platform for exchange-traded derivatives trade
– Stand-alone blockchain bond issuance life cycle

This report explores

emerging DLT use
Equity markets Securities financing
– Replatforming existing post-trade infrastructure
cases across the – DLT platform for repurchase agreements
– Supplementing post-trade infrastructure
capital markets – Securities swaps across collateral pools
– Digital platform covering full securities life cycle – Replatforming securities lending infrastructure
– Equity tokens issued on blockchain

Asset management Enablement use cases

– DLT-based fund distribution and register platform – Wholesale payments
– Investor-facing end-to-end platform for – Facilitating capital markets
tokenized funds digitization
– End-to-end fund distribution, administration and – Custody services for digital assets
servicing network – Digital asset issuance platforms

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 13
1 Background
– Business and technology developments
in capital markets
– Overview of DLT in the capital
markets context
– Timeline of major technical, regulatory
and business developments

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 14
B U S I N E S S A N D T E C H N O L O G Y D E V E L O P M E N T S I N C A P I TA L M A R K E T S

Across the capital markets ecosystem, institutions are facing a

combination of new market dynamics and technology advancements,
presenting opportunities and challenges…

Key business developments Broad technology implications DLT implications Likely impact
on DLT interest
Immaterial Significant

1 Acceleration of digital Increasing experience with artificial Increasing comfort with DLT; potential
transformation, especially intelligence, machine learning, cloud for increased interest in solutions that
following COVID-19: once-emerging and DLT solutions benefit from multiplicative effect of DLT
technologies continue to gain scale, and with other technologies
client demand for digital assets grows

2 Bifurcated client service model: Increasing need for digital self-service DLT and smart contracts can facilitate
transition to a low-touch digital client solutions, as well as digital solutions offering greater automation,
service model for certain clients and enablement solutions to support teams with potential for integration with self-
transactions servicing high-touch clients service solutions

3 Sustainable finance as a source of Increasing need for solutions that Potential demand for DLT-enabled
growth: demand for products that meet capture sustainability impact solutions for measuring, reporting
clients’ sustainability objectives and transacting with sustainability-
related data, potentially linked to
financial instruments

4 Consolidation of trading venues: Potential for more electronic trading More consistent and scalable digital
emergence of a small set of trading and greater standardization in more processes and convergence of market-
venues that will attract the bulk of concentrated markets wide standards could be a tailwind for
liquidity in certain markets DLT implementations, but DLT use could
actually stimulate more trading venues

5 Monetization of data: insights from Increasing need for effective data DLT solutions may offer better data
trade, position and client data to power capture and analytic solutions (e.g. quality and data accessibility than
customized offerings machine learning) existing systems

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 15
B U S I N E S S A N D T E C H N O L O G Y D E V E L O P M E N T S I N C A P I TA L M A R K E T S

…while margin pressures are forcing all players to identify meaningful

cost savings and sustainable sources of revenue growth

Key business developments Broad technology implications DLT implications Likely impact
on DLT interest
Immaterial Significant

6 Sustained cost pressures across Increased investment in modernizing DLT-enabled automation and
the value chain: continued need technologies, with growing demand operational transformation could unlock
to realize meaningful efficiencies via for solutions that unlock step-change significant cost efficiencies, but the
operating model transformations and cost reductions scale of investment might be prohibitive
infrastructure redesigns for some

7 Scale continues to be a key Consolidation of tech solutions and Increasing returns for the DLT solutions
competitive advantage: subscale providers where critical mass takes hold that gain scale and magnify competitive
players will exit or transition to “white- advantage (i.e. first-mover advantage
labelled” products with network effects)

8 Balance sheet capacity continues Increased interest in tech solutions Increased demand for DLT-based
to be a constraint: financial resources that facilitate better capital/liquidity solutions that offer meaningful
continue to be judiciously allocated to management improvements to balance sheet
clients, business lines and products management, with potential for interest
in new models for custody

9 Increased focus on core Service providers become tech leaders, Increased comfort with DLT solutions
competencies: non-core functions offering cost and quality advantages via that power non-core functionality, with
that are not a source of competitive their solutions growing competition among service
differentiation will continue to be providers
transitioned to industry utilities or
external service providers

10 Increased competition: the Firms will continue to seek to Increased demand for DLT solutions
competitive landscape is intensifying differentiate with technology, both as a with clear and differentiated client
among both traditional players and new vehicle for cost savings and improved benefits or that enable step-change
entrants, with continued value migration client experience cost savings
across the sell-side, buy-side and
service and infrastructure providers

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 16
D LT O V E R V I E W

What is distributed ledger technology?

DLT is an immutable distributed

database that governs the flow of data Today Centralized intermediaries and separate databases
between decentralized participants.
– Siloed participants
By ensuring data is consistent, accurate interact via a central
authority
and up-to-date, DLT/blockchain aims to
enhance trust among all participants.1 – Central authority can
be a single point
The technology is built on a foundation of four of failure, limiting
key elements:2 resilience

1. Distributed ledger and peer-to-peer network: data – Centralized

representing assets or transactions is replicated maintenance and
across each node on the network, ensuring resiliency administration
and transparency

2. Digital signatures and hash functions: strong

encryption and anti-tampering measures guard
against data being retroactively altered DLT Distributed, synchronized ledger
3. Consensus algorithms: a consensus mechanism
authenticates the underlying data to ensure Decentralized network – All parties interact
that all participants have the same view of the directly and
data, potentially eliminating the need for trusted access the same,
intermediaries in a transaction synchronized
information (with
4. Smart contracts: machine-executable code is permissions)
automatically triggered to enforce contractual
obligations under predefined circumstances – Highly resilient
(e.g. no single
point of failure, and
numerous redundant
data stores with
Decentralized data continuous syncing)

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 17
D LT O V E R V I E W

DLT’s unique technical properties could provide

material benefits to capital markets

DLT offers the potential for mutualized infrastructure for efficiently managing
shared data and workflows, based on three interrelated technical capabilities:
Newer DLT platforms
have addressed concerns
Trusted sharable data Tokenization Smart contracts about scaling and
Multiple parties have identical, Financial instruments are Smart contracts define market rules, environmental impact
immutable and perpetually established as a digital token, terms of an individual security and/or
synchronized “copies” of a shared with the token serving as either rules for shared business processes, Bitcoin, the earliest and most notable DLT
ledger, eliminating the need for each a representation of the asset or creating the possibility for seamless, platform, can process only a few transactions per
party to maintain its own data silo. as the asset itself. Custody of automated execution of operations second, while transaction confirmations can lag by
the token’s cryptographic key among multiple parties without 10+ minutes.3 Bitcoin’s “proof of work” consensus
confers ownership similar to the manual intervention. algorithm requires highly energy-intensive mining.
custody of a physical bearer By some estimates, Bitcoin mining globally
stock certificate. consumes more electricity than the entire country
of Argentina.4

In contrast, modern DLT platforms, which typically

rely on alternative consensus algorithms such as
“proof of stake”, are orders of magnitude more
Data consensus eliminates Tokenization benefits include: Smart contracts enable fast and energy efficient, while also demonstrating far
manual reconciliations, minimizes reliable zero-touch processing, better performance. A 2018 study conducted by
disputes and increases data sharing, – Faster and lower-cost reducing costs and risk in the Depository Trust and Clearing Corporation,
accuracy and transparency across asset transfers transaction settlement, asset R3 and Digital Asset showed that Corda could
the ecosystem – Fractionalized securities servicing and compliance sustain throughput of 6,300 trades per second.5
– Increased liquidity for In addition to using more energy-efficient
niche markets consensus algorithms, most enterprise DLT use
cases in the capital markets also use private and/
or permissioned ledgers, which consume far less
energy than public ledgers.6

Reduced costs Balance sheet Reduced complexity,

through automation optimization through risk and cost through
and elimination of faster and more efficient removing counterparty
redundant activities capital and liquidity credit risk in settlement
deployments

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 18
D LT O V E R V I E W

Is DLT necessary to achieve

business outcomes?

Key conditions that favour DLT

– Multiple parties requiring trustful interactions
There must be multiple parties that wish to interact via well-understood and shared Can smart contracts achieve the desired outcomes
business processes with pre-agreed workflows, rules and exceptions. Similarly, these – synchronized, automated workflows – without a
parties need to rely on a trusted data source to facilitate their interactions.
distributed ledger?
– Multiple parties require a shared understanding Increasingly, some firms are developing smart contract solutions that do not
There must be substantial value in a single shared version of truth that enables greater necessarily run on a distributed ledger.7 Smart contract languages have been
transparency, efficiency or ease of transaction. designed to empower domain experts to create inter-company applications that
enforce strict data governance and complex workflows, without transforming the
– Challenges with central intermediary underlying database technology. Without a DLT, data integrity would need to be
Markets with no central intermediary – or where reliance on an intermediary presents provided by a trusted central intermediary. In these solutions, smart contracts
challenges (e.g. excessive cost or intermediary does not obviate need for verifying could enable straight-through processing across firms by orchestrating multiparty
data) – stand to benefit more from DLT. workflows, enforcing rights and obligations of the involved parties and ensuring
the appropriate level of data privacy. In principle, these smart contracts could
eventually be migrated to a DLT-based platform with little effort.8

While other technologies enable secure data sharing, PROJECT SPOTLIGHT

cryptography can ensure trust in shared data
As data moves through APIs, institutional boundaries and the patchwork of systems that
comprise a typical value chain, there are many factors that can cause data to become out
of sync (e.g. translation errors, propagation delays, conflicting updates). Even when there
is no data disagreement at the business process level, these small data variations put
substantial pressure on reconciliation processes, which remain both labour-intensive and HKEX Synapse
costly, to detect and fix data issues both internally and between institutions.
HKEX is currently developing a solution that enables participants in the
DLT seeks to obviate reconciliations by using cryptography to ensure that data, once Northbound Stock Connect programme to meet the shorter equities settlement
written, can never be altered. This golden data source is propagated to all authorized window of Mainland China (see slide 42 for details). Rather than building a new
parties in real time so they can automatically audit the complete data lineage to ensure settlement infrastructure based on a distributed ledger, this tool will use smart
that it hasn’t been altered – thereby ensuring that both parties’ data remain in-sync, with contracts on top of the existing centralized infrastructure to synchronize the
verifiable proof that their records are accurate and complete. workflow among parties.9

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 19
D LT O V E R V I E W

Technology stack and technology choices

While some technology choices have limited implications for underlying business
considerations, other choices may have a direct impact on the features and functionalities
of business applications
Degree of system centralization
Distributed ledgers can have controls over who can view, use and
Illustrative technology stack for a DLT-based application validate transactions on the ledger. Unsurprisingly, most capital markets
participants are developing applications on permissioned, private,
hierarchical ledgers. Some argue that this may limit the benefits of the
Applications and business interfaces
technology, but others contend that this construct allows for the level of
trust and control needed in capital markets, while still enabling data to
Client portal Post-trade workflow be shared and processes mutualized.
Off-chain systems
and data sources
Anyone can validate transaction on
Permissionless
Legacy systems the ledger
Updating
Smart contracting language the ledger
Integrations Only trusted parties can validate
Market data Permissioned
transactions on the ledger
e.g. DAML, Solidity, Go External API
Other processes Anyone can read and initiate
Public
Access transactions on the ledger
to use
Other DLT systems the ledger Only trusted parties can read and initiate
Distributed ledger platform Private
transactions on the ledger

e.g. R3 Corda, Hyperledger Fabric, Everyone can hold a full copy of

ConsenSys Quorum, Ethereum, VMware Non-
the ledger and can read all of the
hierarchical
information on the ledger
Access to
view the
ledger Only some parties can hold a full copy of
Infrastructure the ledger or read all of the information
Hierarchical
on the ledger. Some parties may have
Cloud provider view-only permission for specific data
On-premise (e.g. AWS, Azure,
Google, IBM)
Source: Adapted from BIS, “On the Future of Securities Settlement”, 1 March 2020:
https://www.bis.org/publ/qtrpdf/r_qt2003i.htm (link as of 8/4/21), based on Reserve
Bank of New Zealand, “Decrypting the Role of Distributed Ledger Technology in
Payments Processes”, 28 May 2018: https://www.rbnz.govt.nz/research-and-
publications/reserve-bank-bulletin/2018/rbb2018-81-05 (link as of 8/4/21).

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 20
D LT O V E R V I E W

While DLT promises many benefits, it is a fundamentally

new technology, with a range of risks that must be
understood and addressed10

Technology Operational governance Implementation Legal and regulatory

and controls

– Potentially new cybersecurity risks – Limited experience with validating – Ecosystem-wide change – Fragmented and incomplete
(e.g. 51% attack, Sybil attack) and auditing smart contracts management regulatory landscape

– Unique concerns about data security – Challenges with enforcing data – Potential challenges running parallel – Lack of a standard regulatory
and privacy standards across a network operations for certain asset classes “playbook”
or processes
– Interoperability and integration with – Unique governance risks (e.g. – Challenges with new legal
other systems coordinating software upgrades, requirements (e.g. smart
emergency patches and “hard contracts, settlement finality)
– Long-run performance and reliability fork” issues)
uncertainty in production

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 21
D LT O V E R V I E W

Additional detail on DLT-related risks11

Technology Operational governance Implementation Legal and regulatory

and controls

While solutions and platforms are Implementation of DLT-based As DLT-based solutions may offer a In many jurisdictions, financial and
increasingly tested in different scenarios, applications, especially when used radically different way of doing business capital markets regulators have not
DLT is still a bleeding-edge technology by multiple parties, is complex, as for some organizations, effective change made definitive statements or rulings on
that has yet to be tested in all areas decentralized systems introduce new management is critical. Not only must the applicability of existing regulatory
(e.g. extended operations in production governance questions. Key questions firms build the ecosystem, they must frameworks to DLT-based solutions
environments). There are potential risks to answer include: How are these also ensure that the organization has or platforms. Thus, there is a risk in
associated with how DLT-based systems networks upgraded and maintained? the requisite processes and talent to some instances that a key feature of
will integrate with other DLT-based How are smart contracts enforced, effectively assess, develop, measure, a particular DLT application may one
systems and legacy technology and data audited and validated (both at the point monitor and respond to risks. Data day fall foul of future regulations. Even
platforms, including the extent to which of creation and throughout the life cycle standards, data governance and data in jurisdictions with more developed
interoperability will even be possible. of a particular asset)? What are the risks privacy standards must be adopted regulatory frameworks, many institutions
While DLT is resilient to hardware due to incorrect representation of terms and enforced. Additionally, in instances have not yet developed a standard
and infrastructure failures by design, in smart contract code? Is there a risk where an institution is building parallel regulatory “playbook” to ensure that
the unique decentralized architecture of a “hard fork” of the blockchain (i.e. processes for similar assets (e.g. products are developed in line with
may pose novel cybersecurity risks, modifying past transactions or bringing traditional and digitally native assets in regulatory requirements. Legal and
particularly in terms of the security of about other structural changes to the the same asset class), there may be risks regulatory risks include uncertainty
private keys and preventing unwanted blockchain)? Conversely, is there a risk associated with additional complexity for about security registry requirements,
data dissemination. Given the of theft or loss of digital assets because operational teams. cross-jurisdictional regulations, anti-trust
decentralization of confidential data, of the irreversible nature of transactions violations, smart contract enforceability,
DLT systems require new data privacy in the blockchain protocol? And lastly, anti-money laundering (AML) and know-
controls to ensure that parties may how is the real-world change of assets your-customer (KYC), and intellectual
access only certain data; zero-knowledge ownership made consistent and property (IP) protection.
proofs, stealth addresses and several reflected on-chain, if necessary,
other solutions have emerged to address under the legal framework?
these risks.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 22
D LT O V E R V I E W

DLT is one of several technologies transforming capital markets: some

are complementary, and some potential substitutes

Technology Cloud computing AI + machine learning Robotic process automation Next-generation APIs

Description The on-demand availability of computing The application of advanced analytical A productivity tool that runs predefined An application programming interface,
resources (e.g. computer power, storage, methods, including advanced analysis scripts to automate repetitive tasks or API, is an interface that provides
databases, application software etc.), of unstructured data, to create including data entry and transformation. programmatic access to service or data
without the need to manage the supporting multidimensional predictive models that The script mimics the actions taken within a remote application or a database.
infrastructure. Cloud computing typically support and/or automate human by a human worker – within or across APIs that allow minimal, more efficient data
offers a flexible pay-as-you-go model that decision-making applications – in order to execute business transfer – a component of microservices
minimizes upfront infrastructure costs processes, albeit in a narrow and highly design patterns – along with new data
compared to traditional data centres structured way interchange standards (e.g. ISO 20022)
have renewed financial institutions’ interest
in APIs

Benefits Cost efficiencies, faster deployments, Increased automation, enhanced decision- Increased automation of repetitive tasks, Real-time data integration among
reliability, global scale, improved making and process optimization process optimization parties, increased automation, process
productivity and performance, and optimization, increased standardization
flexible capacity

Key capital Infrastructure as a service especially for big Enhancing pre-trade and execution Focused on post-trade and support Primary market intelligence, digital
market data services and analytics, and software activities such as predicting M&A segments, with a high number of repetitive payments, innovative customer
applications/ as a service, especially in HR and sales opportunities/valuation features, producing tasks (e.g. payments processing and applications and experiences
use cases trading signals or servicing client flow client onboarding)

Relation to Complementary Use of cloud can be an Potential substitute Enables straight- Potential substitute Mimics straight- Potential substitute APIs are the main
DLT important enabler for DLT use, accelerating through processing for more complicated through processing for limited sets of tasks system integration tool today, and modern
development with prebuilt infrastructure tasks (e.g. potentially reconciliation) APIs are likely to improve data sharing
across institutions
Complementary Better data for AI models
Complementary DLT use cases with
interoperability rely on APIs

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 23
TIMELINE

Technical and business developments

for DLT in capital markets

1990s 2008 2010 2013 2014 2015 2016 2017 2018 2019 2020 2021

Concepts of Vitalik Buterin The Linux Foundation DTCC demonstrates Emergence of multiparty
distributed computing, introduces Ethereum establishes the that DLT can support computation (MPC)
smart contracts, and smart contracts in Hyperledger Project13 trading volumes in the applications, enabling
cryptographic a white paper13 US equity markets14 calculations on fully
signatures emerge12 encrypted, secure data15
Technical
developments
InterWork Alliance launches and releases
Satoshi Nakamoto Token Taxonomy Framework to promote
releases Bitcoin standardization across DLT platforms and
white paper12 Seven major European banks
announce Digital Trade service providers16
NASDAQ begins a blockchain Chain, a partnership to offer
trial13 a trade finance platform via SGX and Temasek
1990s-2008

2008-2010

2010-2013 ConsenSys announce fixed income-

blockchain13
R3 founded by a consortium Santander acquires focused digital asset
of financial institutions Broadridge pilots blockchain- settles both JPMorgan joint venture, following
(Barclays, Credit Suisse, based repo solution sides of a $20 blockchain successful bond
Goldman Sachs, JPMorgan with Natixis and Société million bond on platform issuance alongside
and RBS)13 Générale17 Ethereum18 Quorum19 HSBC in 202020

Capital
markets DLT World Bank prices first global blockchain bond, raising A$110 million23
ASX selects Digital Asset Holdings to develop DLT post-trade
developments
solutions for cash equities market21 Monetary Authority of Singapore launches Project Ubin, proving interbank
DTCC launches DLT-based upgrade of Trade Information Warehouse settlement use cases for Ethereum18
for derivatives, scheduled to go live in 202322 SIX announces a fully integrated trading, settlement and custody
infrastructure for digital assets24

Bitcoin exchange Mt. Bitcoin breaks $1,000 PayPal launches cryptocurrency wallet
Market capitalization Gox is hacked, files for first time ever, service30
of bitcoin reaches for bankruptcy after reaches $20,000 by
$1 billion13 apparent theft of ~$470 Circle and Visa announce partnership to
year end
million in BTC13 enable stablecoin payments31

Cryptocurrency
and stablecoin The first bitcoin purchase (of Silk Road, a black The DAO, an early decentralized Billionaire Warren Buffett calls bitcoin “rat poison Bitcoin price first tops
developments 10,000BTC) takes place at market where illicit autonomous organization squared”27 $50,000, weeks after
exchange rate of $0.03/1BTC goods were exchanged built on Ethereum, sets a first reaching $30,00032
Total cryptocurrency market cap peaks at over
(worth $190 million in for bitcoin, is shut down crowdfunding record by raising $800 billion18
December 2020)25 by the FBI26 >$150 million; 1 month later
loses one-third of value JPM rolls out the first US bank-backed
via hack13 stablecoin to transform payments business28
Facebook announces Libra29

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 24
TIMELINE

Regulatory, policy and digital currency developments

1990s 2008 2010 2013 2014 2015 2016 2017 2018 2019 2020 2021

China’s central bank Coinbase launches Switzerland to begin US OCC issues letter
bars financial institutions first regulated bitcoin accepting tax payments that federally regulated
from handling bitcoin13 exchange in US35 in bitcoin13 banks can participate
in DLT networks or use
stablecoins34
Policy and
digital currency
developments HMRC (UK) classifies China bans initial coin Several major economies announce
bitcoin as private offerings (ICOs)18 CBDC or blockchain-based payments
money: VAT will not be explorations, with two (Bahamas and
charged on BTC mining Virtual currencies are Cambodia) launching33
or exchange13 officially recognized
in Japan13 The People’s Bank of China completes
several live pilots of retail digital yuan;
CBDC not DLT-based33

Notable regulatory developments

Singapore Germany China Switzerland United States

JULY 2020 Monetary Authority DEC 2020 The German DEC 2020 China regulates SEPT 2020 New DLT regulations DEC 2020 SEC issues guidance
of Singapore (MAS), proposes government abolishes its paper- cryptography, a key component include sanctioning digital for broker-dealer custody of digital
new regulations for digital tokens based certificate requirement, underpinning all DLT platforms. The assets trading venues with assets to be in place for five years,
created in Singapore. Among which paves the way for regulation defines a standard for trading between regulated clarifying requirements separate
other things, the provisions dematerialized securities, including all “encrypted” behaviours, arguing market participants and private from traditional securities.44
strengthen anti-money laundering securities recorded solely on that the existing “loose” systems customers, and custody, clearing
(AML) compliance procedures and distributed ledgers.38 are not suitable for either the and settlement for digital assets. AUG 2020 INX is the first security
expand MAS’s power to impose industry or national interests.40 These regulations also clarify the token IPO registered with the SEC
requirements on technology OCT 2019 In an effort to be “at treatment of digital assets in a that is not currently listed on either
risk management, including the forefront of innovation”, the JAN 2019 The Cyberspace bankruptcy event, and create a stock or crypto exchange.45
cybersecurity risks and data German government publishes Administration of China (CAC) a new type of digital security,
a comprehensive blockchain releases Administrative Provisions JULY 2019 SEC and FINRA issue
protection.36 “uncertificated register”, affording
strategy, which includes on Blockchain Information Services a joint staff statement on custody
these the same protection and
AUG 2017 MAS clarifies when prioritizing the development of a (i.e. blockchain provisions), which of digital asset securities.3146
functionality as a traditional
securities tokens must comply digital identity system.39 encourage industry self-regulation security.42 The regulations seek to
with Securities and Futures Act.37 and define security requirements enable DLT-based innovation while
and penalties.41 remaining technology-neutral.43

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 25
2 DLT and digital
assets in capital
markets
– Spectrum of future scenarios
– DLT-related considerations for different
capital markets actors
– Framework for different approaches to
DLT solutions

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 26
SPECTRUM OF FUTURE SCENARIOS

Financial institutions and technology providers have

developed a range of views on how DLT will be used
moving forward

DLT is unique as an enabling technology in the capital uncertainty about what the future may look like. Adding
markets because it offers a potential pathway both to to the uncertainty is the reality that, in the near term, the
operational simplification for many institutions and to technology is likely to be implemented for different use
disruption, where existing processes and roles may cases across different asset classes and jurisdictions,
be made redundant. As a result, the way in which it likely leading to a range of different future states. An
is employed – influenced by the institutions “leading imperfect mapping of these potential future states would
the charge” – will have a significant impact on the encompass a spectrum of possibilities:
structure of markets moving forward, leading to great

Minimal change Maximal disruption

Existing centralized market Markets for digital-native Many central infrastructure DLT platforms will enable a Decentralized finance (DeFi) will
infrastructure and operations securities will develop in providers will replatform significant disintermediation dominate, with a radical shift
will prevail, with DLT and smart parallel to existing securities with DLT-based systems of current infrastructure of activity away from markets
contracts enabling innovation markets, led primarily by across markets, with market providers and other institutions, controlled by infrastructure
at the margins central infrastructures and participants increasingly leaving a predominantly providers and other
other institutions transforming their operations decentralized market intermediaries (including banks)
to realize the benefits

Digital securities markets will develop

in parallel, but non-DLT-based
systems will phase out over time

Each potential future state implies a different set of roles for different institutions
and a different level of disruption for existing market processes and operations

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 27
D LT- R E L AT E D C O N S I D E R AT I O N S

Strategic considerations differ for players across the

capital markets, though there are common themes

Corporate Investment Broker/ Custodian Asset

issuer bank dealer bank manager
– Potential opportunity – Potential opportunity for – Potential cost savings – Potential cost savings from – Potential opportunity for
for lower cost of funding new lines of business from from streamlined or streamlined or automated new lines of business from
due to wider investment emergence of new asset automated processes and processes and operations, emergence of new asset
base, greater secondary classes or parallel markets operations, and capital/ and capital/liquidity savings classes or parallel markets
market liquidity, lower – Potential cost savings from liquidity savings from more from more flexible settlement – Potential cost savings from
transaction costs and/or streamlined or automated flexible settlement – Potential for better streamlined or automated
direct participation in processes and operations – Potential loss of business optimization of collateral processes and operations
capital markets from greater market due to greater flexibility in (e.g. lower custody costs),
– Potential loss of business
if issuers access markets concentration in over-the- collateral mobility and capital/liquidity
directly counter markets – Potential risk to business savings from more flexible
model if there is a radical settlement
change to the “custody” role

Asset owner/ Exchange Infrastructure Other

investor provider institutions
– Potential opportunity – Potential opportunity to – Potential risk to business (e.g. trustees, transfer
for improved liquidity in expand role in the value model if markets shift agents, registrars)
secondary markets for chain or into additional away from traditional
some asset classes asset classes model of central securities – Potential risk to business
depositories, but strong models due to greater
– Potential opportunity for
regulatory support in transparency in securities
investments in new asset
favour of continued role as and automation of reporting
classes, parallel markets
systemic infrastructure and life-cycle activities, but
or markets that were
legal/regulatory basis for
previously difficult to access – Potential opportunity for new
roles remain in many markets
lines of business in governing
decentralized platforms and – Potential opportunity for
smart contracts new lines of business in
providing value-add

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 28
F R A M E W O R K F O R D I F F E R E N T A P P R O A C H E S T O D LT S O L U T I O N S

Capital markets DLT products or platforms

are being developed across several
dimensions, reflecting key differences
between institutions

Degree of change implied

Improving existing processes Reimagining
e.g. DLT-based infrastructure e.g. fully digital Combined, these choices reflect:
offering greater transparency of securities with
asset-servicing processes life-cycle events Where an institution’s core competencies lie
automated through (e.g. providing trust and data verification, building
smart contracts technology, banking services)

What the institution sees as the critical business

problems that can be addressed by a DLT-based
solution (e.g. over-reliance on reconciliation for
processing transactions, limited transparency and
Scope of value chain included high levels of complexity)

One part of the value chain End-to-end How the institution believes DLT will be used in
e.g. DLT-based equity post- e.g. DLT-based the capital markets in future (e.g. Will DLT be
trade infrastructure equity issuance, used on the margins to solve discreet challenges?
trading, custody and Will DLT-based central infrastructures dominate?
settlement platform Will DLT remove the reliance on central infrastructures
and intermediaries?)

Asset class focus

Single asset class Asset class-
e.g. DLT-based bond-origination agnostic
platform e.g. security token
issuance platform

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 29
F R A M E W O R K F O R D I F F E R E N T A P P R O A C H E S T O D LT S O L U T I O N S

Within and across asset classes, institutions

are developing DLT-based solutions to
improve or reimagine value chains

Considerations

5 1 Pointed improvements
Solutions focused on
Even with a narrow focus,
ecosystem-wide transformation
optimizing specific areas of the may still be needed, but the
value chain path to implementation may
be clearer and easier

Reimagining 2 4 2 Narrow reimagining

Solutions focused on redefining
While narrowly focused on the
value chain, these use cases
specific areas of the value chain may gain traction with only a
limited ecosystem

Degree of change
3 Broad improvements
Solutions focused on optimizing
End-to-end use cases require
change across front-, middle-
many (or most) aspects of the and back-office processes
value chain and teams, introducing
Improving 1 3 additional complexity

4 Broad reimagining
Solutions focused on redefining
These use cases are more likely
to build parallel “digital asset”
many (or most) aspects of the ecosystems to traditional
Narrow focus End-to-end value chain markets, often facing the
“chicken or egg” challenge of
Scope of value chain generating liquidity

5 Wholesale disruption
Solutions, such as DeFi,
focused on entirely rethinking
how the capital markets operate
(out of scope)

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 30
F R A M E W O R K F O R D I F F E R E N T A P P R O A C H E S T O D LT S O L U T I O N S

Use cases in development today reveal a

fragmented and divergent set of visions

2 4
We surveyed more than 60 companies, representing
banks, infrastructure providers, fintech firms and
asset managers.

Reimagining The collective responses validated the great diversity

of use case applications and approaches. Summary
findings include:

70% of projects are live or

nearing release (vs. 30% in earlier
Degree of change stages of development)

~60% lean more towards

Improving improving existing operations
(vs. 40% reimagining)

1 3 ~60% target specific portions of

the value chain (vs. 40% targeting
Narrow focus End-to-end more end-to-end)

Scope of value change

Project status

Live in production Production build/test Pilot Proof of concept Strategic formation

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 31
3 Use case
analysis by
asset class/
product line
This chapter examines DLT-related developments in the capital markets
from the starting point of traditional asset classes and business lines, to
understand how DLT and smart contracts use cases are being adopted
or explored in the industry. Each section examines the different use cases
emerging for each asset class – or specific ways in which DLT could be
used across the relevant value chain, whether aiming to improve existing
processes or disrupt markets as we know them.

– Equity markets
– Debt markets
– Securitized products
– Derivatives
– Securities financing
– Asset management/fund administration
– Enablement use cases

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 32
U S E C A S E A N A LY S I S

While DLT use cases are being explored across capital

markets, this report offers a deeper examination of efforts
in core securities markets and related businesses

Securities markets Adjacent product lines

Equity Debt markets Securitized Derivatives Securities Asset

markets products financing management

Focus areas – Publicly listed – Corporate bonds – Mortgage-backed – Exchange- – Repurchase – Mutual funds
equities – Commercial paper securities traded and OTC agreements – Private funds
– Government – Asset-backed derivatives – Securities lending (private equity, debt
bonds securities and hedge funds)
– Collateralized loan
obligations

Key processes – Primary issuance – Primary issuance – Loan origination – Trading – Collateral – Fund origination
– Secondary – Secondary – Loan servicing – Clearing allocation – Fund distribution
markets markets – Securitization/ – Position – Clearing and – Transfer agency
– Clearing and – Clearing and issuance management settlement – Fund administration
settlement settlement – Secondary – Settlement – Collateral swaps – Securities services
– Custody and asset – Custody and asset markets – Custody
servicing servicing – Security servicing

Enablement use cases

DLT-enabled or supporting products and services being developed in order to facilitate digitalization across asset classes: wholesale payments;
digital asset custody and services; digital asset issuance and life-cycle management tools

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 33
U S E C A S E A N A LY S I S

How to read the following sections

The subsequent pages examine DLT Each detailed use case description
use cases for each asset class or (one or two pages) includes:
product line. Each section includes:
– A summary description of the use case
– A high-level summary of opportunities and
developments in the asset class – The use case plotting on the “degree of change” and
“scope of value chain” framework (presented on slides
– An overview of the asset class or product line, 29-31)
including a summary of market characteristics and
major relevant participants – Value chain components that may be affected/
addressed by the use case
– An illustrative value chain for the asset class or
product line, including existing pain points and – Major intended changes to processes or operations
potential DLT roles from the current state (at a high level, as these are
likely to vary for different solutions)
– A summary of the use cases to be examined
– Proposed benefits of the use case, along with
potential risks or challenges

– What the potential path forward might look like,

including enablers and impediments

– Examples of solutions being developed by different

firms, as well as a spotlight on notable examples

The inclusion of a firm’s solution or discussion as a spotlight does not reflect an endorsement of the company or its
products and services by the World Economic Forum.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 34
EQUITY MARKETS

Equity markets: summary

While most market participants and service providers consider

operations and infrastructure in public equity markets to be
efficient, a range of parties are exploring or bringing to market
DLT-based or smart contract solutions, including applications
aiming to:

– Introduce greater flexibility in clearing and settlement timelines

– Reduce or eliminate settlement risk

– Address operational burdens associated with data siloes in

post-trade processing

Given the scale of transformation required to achieve the

potential benefits of most DLT-based solutions in centralized
public equities markets, these developments are primarily in the
early stages.

Privately held equities – which do not benefit from the central

infrastructures, standardized processes and ample liquidity of
the public markets – are likely to continue to be a focus for many
parties. Many of the solutions in development attempt to bring
the efficiencies of public equity markets to private and SME
shares using DLT and tokenization.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 35
EQUITY MARKETS

Overview of asset class

Market overview
Globally, the market capitalization of publicly traded Several intermediaries and infrastructure providers facilitate the flow of capital from investors to equity issuers,
equities totalled more than $95 trillion at the end of trading between investors, and processing of corporate actions
2019.47 With an average of $500 billion–$750 billion in
annual issuance (over the preceding decade), equity
markets remain an important funding tool for corporations
and an essential asset class for investors. While market
liquidity varies by country and market, most equity
markets are deep and liquid relative to other asset
classes, with significant daily trading volumes.
Exchange/trading
Investment banks/ venue Global custodians
Key characteristics underwriters

Equity markets are primarily concentrated in a limited

number of public exchanges for each jurisdiction, which
tend to be highly regulated. Increasingly, trading also
takes place in dark pools, or private trading venues
operated by broker-dealers or other parties, to facilitate Corporate Central Broker-dealers Asset owners/
large trades by institutional investors. Both public issuers counterparty investors
exchanges and private trading venues rely primarily on
electronic trading between registered brokers. Trades
tend to be centrally cleared by central counterparties
(CCPs). These markets rely on central securities
depositories (CSDs), which register ownership,
safekeep either physical or dematerialized securities Transfer agents Local custodians
and effect transfer of ownership through their securities Central security
settlement systems. depository

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 36
EQUITY MARKETS

DLT in the equity market value chain

Primary market Secondary market Post-trade Life-cycle management

Issuance Trading Clearing Settlement Custody Asset servicing

– Pre-issuance workflow – Order instructions – Margins calculated and – Cash payments sent – Maintenance/ – Processing dividend
– Registration with CSD, – Trade capture/routing requested and confirmed safekeeping and payments, splits, rights
exchange/trading – Centrally cleared trades – Ownership of securities reporting of ownership issues etc. on behalf of
– Order book matching
venue, regulator(s) novated transferred records issuer
– Trade validation
– Obligations netted – Reconciliation by – Corporate action
– Confirmation sent to management on behalf
– Net security/ relevant parties
clearing agent/venue of asset owners
cash obligations
communicated

B C B C B C D A B C D B C B C

Anticipate biggest changes in post-trade and life-cycle activities

Existing pain points Potential DLT roles in equities

Although equity markets are a largely mature ecosystem with efficient processing, While there are opportunities to apply a range of technology solutions to address pain
participants still face challenges associated with legacy processes and systems: points and modernize many participants’ technology stacks, DLT may be uniquely suited
to optimize post-trade operations and life-cycle management, by:
Settlement/counterparty risk, requiring costly margins and capitalization of the central
A
counterparty – Synchronizing references and mutualizing workflows across all parties involved
in trading, settlement, custody or corporate actions, thereby limiting the need
Data siloes between institutions, requiring manual reconciliation across the life cycle for reconciliation
B
of equities
– Automating settlement instructions and/or corporate actions processes using
Substantial numbers of intermediaries involved in transactions, many required by smart contracts
C
regulation
– Reducing settlement risk and/or settlement time frames or enabling greater flexibility
D Ageing legacy infrastructure systems in some jurisdictions in settlement time frames

These factors combine to make equity issuance relatively expensive, limiting issuers to
only the largest companies in any market.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 37
EQUITY MARKETS

Summary of emerging use cases in

equity markets

1 2 3 4
Replatforming existing Supplementing post-trade Digital platform covering Equity tokens issued
post-trade infrastructure infrastructure full securities life cycle on blockchain

What? Replace existing centralized post- What? Introduce a DLT-based system What? Introduce a DLT-based end-to- What? Issue equities as security tokens
trade infrastructure (e.g. CSD, settlement on top of the existing post-trade end platform enabling the issuance, on a public or permissioned distributed
system and/or clearing house) with a infrastructure for a specific use case and/ trading, post-trade and servicing of ledger, with trading across multiple digital
DLT-based system or set of users digitally native securities asset exchanges

Who? Led by the existing central Who? Led by either the existing central Who? Can be led by existing central Who? Can be led by financial technology
infrastructure provider, but likely to require infrastructure provider or a challenger; infrastructure providers, challenger providers, with potential for this model
operational changes by all clearing likely to require adoption by a more infrastructure providers (e.g. digital asset to intersect with end-to-end digital
participants limited ecosystem exchanges) or other parties; ecosystems platforms and/or DeFi exchanges;
may include participants across the currently regulatory environments would
Why? Enable operational efficiencies Why? Varies by specific example, but value chain, including direct access by permit only privately listed securities to be
from a shared single source of truth and generally designed to take advantage of corporate issuers and/or investors issued in this manner
the use of smart contracts; potential for the ability to mutualize workflows across
settlement flexibility; potentially enable participants (thereby reducing the time Why? Enable the full potential of digital Why? Enable the full potential of digital
future innovation and interoperability required to process certain transactions) assets (end-to-end processes automated assets (end-to-end processes automated
with emerging payments systems (e.g. and/or the ability to settle atomically in by embedded smart contracts, risk-free by embedded smart contracts, risk-free
CBDCs) real time (thereby eliminating the need to atomic settlement etc.) in a regulated atomic settlement etc.) at a potentially
fully fund central counterparties) environment in parallel to existing significantly lower cost, enabling greater
infrastructure access

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 38
EQUITY MARKETS

Replatforming of existing equities Replatforming / Supplementing / End-to-end / Equity tokens

post-trade infrastructure

Overview
Reimagining
In several jurisdictions, market infrastructure providers technologies, rather than reinvent or disrupt an existing
are replacing, or considering replacing, existing systems value chain. Degree of change
with DLT-based solutions, essentially moving the CSD
onto a distributed ledger. While some aim to address Replacements are also targeted in scope, applying DLT to a
Improving
specific market inefficiencies, others are focused on specific use case, for example, in post-trade infrastructure,
DLT as a replacement for ageing legacy systems. A rather than attempting an end-to-end solution. This
replacement can be a massive undertaking in terms approach tends not to disintermediate any stakeholders,
of investment and market-wide education, but the even though some roles can be redundant, with activities Narrow focus End-to-end
objective is to improve existing processes via new performed by the technology or by other parties. Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Proposed benefits* Potential risks/challenges

– Introduce a single source of truth on trade data, – Introduce a single source of truth on trade data, Requires all clearing participants to migrate to the new
accessible by all participating parties (via a node on accessible by all participating parties (via a node on platform and adopt new operating procedures
DLT network or API interface) DLT network or API interface)
While, in principle, flexible and/or shorter settlement
– Potential to mutualize workflows associated with – Potential to mutualize workflows associated with should reduce counterparty risk, new (or multiple)
asset servicing (e.g. processing corporate actions) asset servicing (e.g. processing corporate actions) settlement timelines would introduce the need for
through shared data and smart contracts through shared data and smart contracts new risk management practices, regulatory capital
requirements and market structures and processes that
– Introduce ability to conduct non-batch delivery vs. – Introduce ability to conduct non-batch delivery vs. might take time to perfect
payment (DvP) settlement payment (DvP) settlement

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 39
EQUITY MARKETS

Replatforming of existing equities Replatforming / Supplementing / End-to-end / Equity tokens

post-trade infrastructure

Potential path forward

Despite being driven by a central infrastructure, this – Most equity markets are electronically traded, so
approach requires moving an entire ecosystem. As such, market participants are used to high levels of straight-
the market can transition only when all participants are through processing PROJECT SPOTLIGHT
comfortable with the new processes and operational
requirements. But phased transition plans enable the Impediments
central infrastructure to “switch on” additional features – Despite standardization in many markets, decades of
and functionalities of the new system over time, thereby building upon legacy systems has led to significant
limiting the degree of operational change required at fragmentation across market processes and internal
one time. Participants may not realize the core benefits systems, thereby making it difficult to develop
at first. For example, rather than maintaining a node standard playbooks for transitioning
on the distributed network, clearing participants may ASX CHESS Replacement
still be able to use traditional messaging interfaces for – Clearing participants and regulators may see The Australian Securities Exchange (ASX) is in the
communicating with the CSD. However, over time, infrastructure providers as too systemically important process of replacing its legacy post-trade system
they could transition to directly participating in the DLT to be early movers with cutting-edge technology, (CHESS) with a DLT-based system. Participants
network by hosting their own node. In this example, thereby limiting many institutions’ willingness to will be able to communicate with the system
clearing participants would receive the maximum pursue this model using ISO 20022 messages over SWIFT or a web
platform benefits only by hosting a node. interface (operationally similar to the status quo)
Example firms/projects/products or by hosting a DLT node, which would introduce
Enablers new functionalities. The project has been under
– Markets where securities are already dematerialized ASX (in partnership with Status: in production way since late 2017, with a plan to go live in
require limited change to regulation/legislation to Digital Asset): CHESS build, scheduled to go spring 2023, following extensive consultation
pursue a DLT-based CSD Replacement live 2023 with stakeholders.48

– More concentrated equity markets with fewer TMX and Bank of Status: successful
participants are more likely to be able to make this Canada (in partnership proof of concept
transition (given fewer and less diverse stakeholders with R3): Project Jasper in 2018
to consult) Phase III

– Availability of CBDC could prompt greater comfort

with DLT among both infrastructure providers and
market participants, as CBDCs would allow for atomic
DvP settlement in central bank money

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 40
EQUITY MARKETS

Supplementing post-trade infrastructure Replatforming / Supplementing / End-to-end / Equity tokens

Overview
Central infrastructure providers and new entrants are transactions. Importantly, these use cases do not Reimagining
developing solutions that supplement existing market require the entire market ecosystem to migrate to
infrastructure to address specific challenges. While new technologies or processes, enabling a subset of Degree of change
specific approaches vary, the common theme is an operationally prepared parties to benefit from advantages
attempt to use DLT (or smart contracts) to automate offered by the technology. Though focused on improving
Improving
clearing and settlement processes while still relying on existing processes via new technology, this approach can
the core underlying CSD. This might enable greater potentially reimagine a portion of the equities value chain
flexibility or speed in settlement, or alternatively could as participants develop comfort with the technology.
enable bilateral (rather than central) clearing for certain Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Proposed benefits* Potential risks/challenges

– Clearing participants do not need to capitalize the central A supplemental clearing system could introduce
– Ability to settle atomically on a continuous basis counterparty, but need only to fund margin for their own additional operational complexity for some participants,
or net settlement obligations on a bilateral basis, settlement obligations, thereby freeing up liquidity thereby introducing additional risk
rather than novating trades and clearing centrally
in batch processes – Enable better balance sheet management (e.g.
reduced funding requirements for risk capital, clearing
– Potentially introduce the ability to settle certain trades fund and/or settlement liquidity)
on a shorter timeline
– Ability to mutualize and automate workflows across
– Introduce a single, shared source of truth on parties, and potentially conduct processes in parallel
settlement instructions/obligations, accessible by all (with potential to reduce settlement time as a result)
relevant parties (or a subset of parties) for specified
transactions – Greater transparency into settlement status and open
positions throughout the day

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 41
EQUITY MARKETS

Replatforming / Supplementing / End-to-end / Equity tokens

Supplementing post-trade infrastructure

Potential path forward

By enabling a limited number of technologically and Impediments
operationally prepared participants to become early – For new entrants in the infrastructure space,
adopters of a DLT-enabled solution, use cases following regulatory scrutiny is likely to be substantial given the PROJECT SPOTLIGHT
this approach have the potential to build trust in the potential for systemic importance
underlying technology. Building upon this foundation, new
entrants are well positioned to enlarge the scope of their – For some use cases, it might be difficult to expand the
offering over time, possibly expanding vertically and/or user base quickly; and given network effects, this may
horizontally to offer a full additional market infrastructure limit the potential benefits realized by participants
to challenge dominant market players. Similarly, existing
infrastructure providers would likely be able to build on Example firms/projects/products HKEX Synapse
the technology more confidently, expanding the scope of HKEX is in the process of developing a solution to
DLT- or smart contract-enabled services, either to further HKEX (in partnership Status: in production streamline post-trade workflows for participants
supplement their existing offering or eventually replace with Digital Asset, build, scheduled to go in the Northbound Stock Connect. While using
it. Regardless of whether they are offered by existing DTCC): Synapse live 2022 a centralized system (not a distributed ledger),
infrastructure providers or new entrants, it is unclear this product aims to ensure that different parties’
how these services would coexist with an end-to-end Paxos: Securities Status: live in settlement processes can take place in parallel
digital market infrastructure or DLT-based replatforming of Settlement Service production for limited to facilitate compliance with Mainland China’s
existing infrastructure. set of participants (with t+0 settlement window. The system will be built
permission of US SEC) on top of the existing Stock Connect post-
Enablers trade infrastructure, using smart contracts, API
– Since these use cases are aimed at solving specific DTCC: Project Ion Status: in prototype connectivity (built on ISO 20022 standards) and
problems, they are likely to be developed in close development DTCC’s trade processing systems to facilitate a
consultation with initial partners, thereby ensuring an single source of truth for settlement instructions
interested client base and instantaneous status updates. Announced in
November 2020, this is scheduled to go live
– Availability of CBDCs would likely prompt greater in 2022.49
comfort with DLT among both infrastructure providers
and market participants, as CBDCs would allow for
atomic DvP settlement in central bank money

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 42
EQUITY MARKETS

Digital platform covering full securities life cycle Replatforming / Supplementing / End-to-end / Equity tokens

Overview
Reimagining
Some central market infrastructures or financial parallel to existing market infrastructure and existing
technology firms are building new, end-to-end digital securities markets, offering an alternative digitized version
platforms to integrate the full life cycle of securities of a standard asset class. While DLT may be the core Degree of change
and other digital assets. The platforms enable market technology on which the “Central Securities Depository”
participants and intermediaries to list or issue, trade, is maintained, some functions/processes may use Improving
settle trades and provide custody services for digital existing technologies if there is no clear case for using
assets – in this case, digitally native equity tokens – in DLT. This approach does not necessarily disintermediate
a fully regulated environment. These platforms exist in any parties, although some roles may become redundant. Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Proposed benefits* Potential risks/challenges

– Introduce a single, shared source of truth on all – Greater transparency for all parties
aspects of the security, including ownership and post- A supplemental market infrastructure could introduce
trade activities – Potential to reduce complexity in operations and/or additional operational complexity
operational burdens associated with reconciliation activity for participants
– Enable programmability of securities from issuance
– Potential for streamlining/automating all processes Need for mechanisms to verify smart contract terms upon
– Potentially introduce the ability to settle certain trades associated with servicing security, clearing and settling issuance
on a shorter or more flexible timeline and/or maintaining compliance
Need to rethink regulation requiring separation of
– Potential for investors and issuers to interact – Enable better balance sheet management (e.g. reduced responsibilities in securities value chain
directly with market infrastructure or exchange funding requirements for risk capital, clearing fund and/
(or with one another) or settlement liquidity)

– Issuers could potentially list directly and/or have greater

transparency of ownership, without relying on additional
intermediaries, potentially lowering cost of capital

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 43
EQUITY MARKETS

Digital platform covering full securities life cycle Replatforming / Supplementing / End-to-end / Equity tokens

Potential path forward

A range of potential (not mutually exclusive) future Impediments
states exist: (1) infrastructure coexists with traditional – “Chicken and egg” scenario: liquidity begets issuance,
infrastructure indefinitely, providing regulated services to which begets liquidity, but without strong incentives to PROJECT SPOTLIGHT
a select group of investors and issuers; (2) participating issue or invest in this market (vs. traditional markets),
parties begin to realize cost savings (from process both will remain limited
streamlining and risk mitigation) and/or greater liquidity
from access to global markets, leading to a preference – In order to truly open a global liquidity pool, a
for this platform and therefore a “sunsetting” of traditional range of regulations need to be harmonized across
infrastructures; (3) regulation evolves to permit issuing, jurisdictions, in addition to further development in
trading, settlement or custody without certain parties, technological interoperability between systems
leading to those parties’ roles being eliminated/scaled Swiss Digital Exchange
back; (4) a DLT-based platform is deemed essential only Example firms/projects/products SIX Swiss Exchange is in the process of building
for cryptocurrencies and a limited set of digital assets, SDX, an end-to-end, fully regulated exchange
limiting applications to regulated securities markets. SIX Digital Exchange Status: in production and CSD for the listing, trading, settlement and
(SDX) build custody of digital assets. It aims to allow financial
Enablers institutions to trade digitized shares, bonds and
– Regulators are more likely to be open to new other assets with the help of distributed ledger
infrastructures (especially from existing providers), DTCC: Project Whitney Status: proof of value
technology. SDX is not targeting publicly listed
rather than attempts to replace systemically important (for private markets)
equities as one of the initial asset classes on the
systems with new technology platform (choosing instead to focus on asset
SBI Holdings, SMFG: Status: in production classes with more significant inefficiencies,
– Growing institutional investor interest in Osaka Digital Exchange build including private SME equity shares). SDX was
cryptocurrencies could drive enough initial interest in founded in 2018, launched its prototype in
digital issuances to create a virtuous cycle September 2019 and plans to go live with several
SDX, SBI: Singapore- Status: in production
asset classes in 2021.150
based digital asset build
– Availability of CBDCs would likely prompt greater
exchange
comfort with DLT among both infrastructure providers
and market participants, as CBDCs would allow for Gibraltar Stock Status: live in production
atomic DvP settlement in central bank money Exchange: GRID

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 44
EQUITY MARKETS

Equity tokens issued on blockchain Replatforming / Supplementing / End-to-end / Equity tokens

Overview
Reimagining
This approach is potentially the most disruptive threat to markets could intersect with DeFi (decentralized finance),
existing equity markets, with DLT being used to replace through decentralized exchanges, allowing for multiple Degree of change
most of the traditional intermediaries and processes in trading venues and a range of additional applications.
equity markets. By listing securities directly on public While, to date, the focus has been on private shares –
Improving
blockchains – either on their own or with the help of banks whose fragmented markets and largely manual processes
– issuers could eliminate many of the processes associated could benefit from the potential for standardization and
with each component of the value chain (e.g. operations automation offered by DLT – many anticipate a future
designed for legacy environments or required by current blurring of the lines between traditional publicly listed Narrow focus End-to-end
regulations). Security tokens are one area where traditional equities and tokenized private company shares. Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Potential risks/challenges Potential path forward
– Rather than issuing on a centralized exchange with Fundamental change to existing market functioning, with
a single CSD, tokens would be issued on a public or no fundamental agreement on how roles (e.g. custody) This approach faces the greatest uncertainty, but most
permissioned blockchain, with investors accessing are defined In many jurisdictions, changes to securities see strong potential for SME issuance and significantly less
markets and trading through multiple decentralized legislation could be required for public equities to be opportunity in the traditional public equity markets. However,
exchanges issued directly to blockchains, thereby limiting activity in a range of future scenarios exists: (1) issuance is driven
the space for all but the smallest firms primarily by SMEs and other firms traditionally excluded from
Proposed benefits* capital markets, but limited demand from investors prevents
– Potentially significantly lower cost of issuance, thereby In some jurisdictions, regulatory requirements around the market from taking off; (2) investor demand and DeFi
opening access to smaller firms disclosures and transparency could be prohibitive to growth leads to robust private markets for private equity
smaller companies interested in issuing shares on DLT shares issued on blockchain, bringing liquidity to the market
– Without consideration for legacy architecture or platforms Potentially exposes participants to a new class and blurring the line between public and private shares; and
processes, a likely easier path to realizing the workflow of cyber risks, thereby necessitating an entirely new control (3) archetypal bottom-up disruption, beginning with SMEs
and operational benefits offered by the technology framework and private firms but eventually expanding to other market
segments as participants realize the benefits and cost
savings associated with listing on public blockchains vs.
traditional markets.

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 45
Debt markets: summary

Fixed income – and bonds, in particular – has been seen

by many observers and participants as an asset class with
significant potential for digital transformation, with several
major DLT-based projects under way (including a number of
highly publicized “blockchain bonds” issued in recent years).
While there is substantial variation in market characteristics
and functioning between different fixed-income markets,
challenges that could potentially be addressed by DLT-based
digitalization include:

– Inefficiencies in issuance, trading and post-trade processes

– Illiquidity in secondary markets and limited primary

market issuance

– Limited access to markets due to high minimum

transaction sizes

As with other asset classes, various institutions attempt to

address these challenges through both end-to-end platforms
and solutions that are more narrowly focused on specific
components of the value chain. Given the fragmented, over-
the-counter nature of secondary market trading, bonds are
seen as both likelier to benefit from DLT-based solutions and
easier to transform, without necessarily requiring wholesale
market transformation.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 46
DEBT MARKETS

Overview of asset class

Market overview
Fixed-income debt markets are highly diverse, with
instruments defined primarily by their issuers (investment- Several intermediaries and infrastructure providers facilitate the flow of capital from investors to corporate or
grade corporates, high-yield corporates, national sovereign bond issuers, trading between investors and the flow of funds from coupon and principal payments:
governments and subnational governments) and their
maturity (shorter-term paper and longer-term bonds). In
some cases, markets for retail and wholesale investors
are also separate. Within each of these categories, bonds
differ in terms of their seniority in the capital structure
and, most importantly, the terms of the debt. As such,
even in bonds from the same issuer, there is relatively little Bond (For some bonds)

fungibility between issuances. Globally, the notional value registrars Exchanges/

of bonds outstanding totalled $106 trillion at the end of trading venues
2019, with a range of $17 trillion–$21 trillion in annual
issuance over the preceding decade.51
Global Broker-dealers
custodians
Key characteristics
Issuers Agents/ (For some bonds) Asset Asset
Market operations and functioning vary significantly trustees Clearing managers owners/
across countries and types of instruments. In general, houses investors
bonds tend to be traded over-the-counter (OTC), with
some trading taking place on exchanges. While recent Local Market makers
years have seen an increase in electronic trading, most custodians
trading involves orders placed telephonically with broker-
dealers. Some markets are entirely or partially centrally
cleared, while many instruments always settle bilaterally. Investment Settlement
Liquidity in bond markets ranges dramatically, from banks/ system/central
the deep and highly liquid US Treasury market to many underwriters security
syndicated corporate bonds that are held to maturity. depository
Law firms

Ratings agencies

Numbering agency

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 47
DEBT MARKETS

DLT in the fixed-income debt value chain

Primary market Secondary market Post-trade Life-cycle management

Issuance Trading Clearing Settlement Custody Asset servicing

– Rating agency analysis – Price/liquidity discovery If centrally cleared: – Cash payments sent – Maintenance/ – Maintenance/
– Legal documentation and order instructions – Margins calculated and and confirmed safekeeping and safekeeping and
preparation – Trade capture/routing requested – Ownership of securities reporting of ownership reporting of ownership
transferred in the CSD records records
– Investor roadshow – Order book matching – Net security/
cash obligations – Reconciliation by – Life-cycle management/ – Life-cycle management/
– Issuance announced – Trade validation
communicated relevant parties processing on behalf of processing on behalf of
and book opened – Confirmation sent to asset owners asset owners
– Allocation and pricing clearing agent/venue
– Registration with CSD

A B C D E B F F G D F F

While pain points are concentrated in secondary market trading, they also reflect challenges and inefficiencies across the entire value chain

Existing pain points Relatively high minimum ticket sizes (given high – Automating settlement instructions and/or life-cycle
E
Given the diversity in bond markets, pain points vary transaction costs) exclude most retail investors events using smart contracts
somewhat between different debt instruments:
All parties retain siloed data structures, calculating – Creating a low-cost new infrastructure for bond
F
The corporate bond issuance process is highly payments and other transactions independently markets without established infrastructures (e.g. retail
A
manual and prolonged, with significant time using reference data, thus creating inefficiencies issuances in emerging markets)
required to issue and receive proceeds
Extended settlement time frames add additional – Fractionalization of debt instruments
G
Because secondary markets are largely over-the- cost and risk
B
counter, liquidity tends to be fragmented, with – Entirely new products enabled by smart contracts
limited ability to accurately price trades Potential DLT roles in debt markets (e.g. creating a new instrument by separating coupon
While the inefficiencies in debt markets could be addressed payment cash flow from a bond)
Corporate bond markets tend to face limited by a range of technologies replacing or augmenting manual
C
secondary market liquidity overall, thereby limiting processes, there may be opportunities for which DLT is
some investor interest and affecting cost of capital particularly well suited, such as:

Trading processes are largely manual, leading to – Establishing a single source of truth for reference
D
significant inefficiencies and poor data quality for data on bond terms, trade and settlement status,
all participants ownership and coupon/repayment instructions

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 48
DEBT MARKETS

DLT in the fixed-income debt value chain

1 2 3 4 5
Platform for Distributed order Platform covering Retail bond “Stand-alone”
digital bond book for bond full corporate bond issuance and blockchain bond
issuance trading life cycle distribution issuance
What? Replace existing manual What? Establish a distributed What? Introduce a DLT- What? Develop DLT platform to What? Issue a stand-alone
pre-issuance processes with a platform for consolidating based end-to-end platform facilitate retail investor access bond via DLT to test the
digital platform that connects all trade orders, where orders are enabling the issuance, trading, to corporate and government underlying technology and
relevant parties visible only to potential trading settlement and custody of bonds (via tokenizing and prove its value
matches digitally native bonds fractionalizing bonds)
Who? Led by third-party Who? Generally speaking,
technology provider or Who? Led by third-party Who? Led primarily by Who? To date, primarily the issuances have been
exchange/infrastructure, with technology provider, but exchanges/infrastructure governments and financial arranged by one bank or a
the goal of including all parties including both buy- and providers and/or bank institutions in emerging markets small syndicate, with a limited
involved in a bond issuance sell-side market participants consortia, with participant seeking to develop a trusted, number of investors and limited
(e.g. issuer, banks, CSD, involved in secondary market ecosystem including issuers, low-cost infrastructure and secondary market trading
registrar, ratings agencies, law trading infrastructure providers and a distribution channel for bond
firms etc.) range of other service providers investments by retail owners Why? Affirm DLT’s potential
Why? Reduce fragmentation ability to modernize/optimize
Why? Reduce the time and and manual price/liquidity Why? Enable the full potential Why? Enable a larger the bond issuance process
cost required to issue a bond discovery in the corporate of digital assets (end-to-end population of retail investors (e.g. faster time to market,
by digitizing current manual bond markets by creating a processes automated by to both own and trade bonds increased scalability, lowering
processes and patchwork of concentrated trading venue embedded smart contracts, efficiently and at low costs, issuance costs etc.)
paper documentation; possible with minimal data leakage risk-free atomic settlement etc.) where the existing infrastructure
to achieve with traditional in a regulated environment in supports only high-ticket-price
technologies, but DLT may allow parallel to existing infrastructure investments
for greater certainty in data

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 49
DEBT MARKETS

Platform for digital bond issuance Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

Overview Reimagining

Numerous firms are developing digital solutions to digital channel, replacing the current patchwork of paper Degree of change
address inefficiencies in the processes to issue bonds. documentation shared via email and fax. In doing so, they
While some of these solutions use DLT outright, others reduce the time required to issue a bond and the cost
Improving
use a combination of connected, centralized databases of issuance. These solutions do not necessarily aim to
and smart contracts, with the potential for interoperability achieve downstream efficiencies in trading, settlement or
with DLT-based platforms in the future. These solutions life-cycle management – though some are built to issue
are designed to bring together the relevant parties digital bonds that will integrate with other platforms to Narrow focus End-to-end
involved in a bond issuance through a streamlined achieve end-to-end efficiencies. Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Potential risks/challenges Potential path forward
Replace existing manual issuance processes with a Given the need to integrate workflows from non-financial
digital platform (either DLT-based or centralized); existing institutions (e.g. law firms, ratings agencies, issuers), While a digital bond issuance platform could achieve
initiatives focus on one or both components of issuance: coordination/onboarding challenges may be substantial stand-alone efficiencies (without changing the underlying
security status), observers believe these platforms will earn
– Document preparation processes Uncertainty about technology fit (i.e. whether DLT is significantly more value when combined with an end-to-end
uniquely able to address issuance workflow inefficiencies) digital infrastructure. Securities can subsequently be issued
– Primary issuance allocation and pricing on a distributed ledger, with smart contracts to automate
Example firms/projects compliance and life-cycle management, and ultimately traded
Proposed benefits* and settled in a more frictionless manner. By introducing greater
Expedited issuance by streamlining communication Nivaura Aurora Status: live in standardization in bond issuances, platforms can expedite the
and document preparation (elimination of inefficiencies production development of a broader digital infrastructure. Conversely,
including substantial manual back-and-forth, errors, some market participants also believe that issuance processes
lack of transparency and lack of standardization and agora Digital Capital Markets Status: can be improved with relatively straightforward digital tools,
structured data) (building end-to-end smart bonds, production potentially limiting market participants’ appetite for DLT or other
but initial focus on issuance) scheduled 2021 emerging technologies. Either way, the successful transition
to digital operating models during the COVID-19 pandemic
DirectBooks (not DLT-based) Status: live in
is likely to encourage institutions to replace manual
production
correspondence with digital collaboration platforms.

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 50
DEBT MARKETS

Distributed order book for corporate Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

bond trading

Overview Reimagining

Some firms seek to use DLT and related technologies maintain control of their trading data. This could promote Degree of change
to address core inefficiencies in secondary markets for greater liquidity for corporate bonds, which generally face
corporate bonds. Rather than tackling bond issuance, illiquidity due to both the idiosyncratic nature of individual
Improving
the underlying infrastructure for custody and settlement securities and the structure of bond markets, where
or end-to-end tokenization, efforts are focused on bond trading primarily takes place over-the-counter.
trading to bring greater transparency and liquidity into
bond markets while allowing market participants to Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Potential risks/challenges Potential path forward
Rather than contacting multiple dealers to locate Achieving benefits requires substantial trading activity to
inventory/ trade matches, orders are routed to a DLT- migrate to platform, potentially centralizing risk in a new Since corporate bond trading is decentralized across
based platform, where orders are visible only to potential trading venue many venues and market participants, a stand-alone DLT-
trading matches based trading platform could drive value without requiring
Uncertainty about technology fit (i.e. whether DLT is the entire ecosystem to transform. However, observers
Proposed benefits* uniquely able to address trading inefficiencies), particularly question whether a DLT solution for trading would limit
– Reduce fragmentation in corporate bond trading as electronic trading platforms gain trading market share interest in other DLT-based bond market solutions (e.g.
(assuming sufficient adoption) issuance tools or underlying custody and settlement
Example firms/projects infrastructure) or if it might lead market participants to be
– Allow better data controls, limiting leakage of trade more open to such solutions.
information (and potentially allow participants to LedgerEdge Status: in development;
monetize their trading data) scheduled to launch
autumn 2021

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 51
DEBT MARKETS

Platform covering full corporate bond Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

life cycle

Overview
Reimagining
As with the equity market, several exchanges/ infrastructure and existing bond markets, offering an
infrastructure providers and financial technology firms are alternative digitized version of standard bonds. While
developing end-to-end platforms for debt-fixed income DLT may be the core technology on which the “Central Degree of change
securities. The platforms enable market participants and Securities Depository” is maintained, some functions/
intermediaries to list or issue, trade, settle trades and processes may employ existing technologies if there is Improving
provide custody services for digital assets – in this case, no clear case for using DLT (e.g. trading). This approach
digitally native bonds – in a fully regulated environment. does not necessarily disintermediate any parties, although
These platforms exist in parallel to existing market some roles may become redundant over time. Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* Proposed benefits* Potential risks/challenges

– Introduce a single, shared source of truth on all – Greater transparency for all parties Need for mechanisms to verify and validate smart
aspects of the security, including terms, ownership contract terms among all relevant parties upon issuance
and trade/ post-trade activities – Potential to reduce complexity in operations and/
or operational burdens associated with reconciliation Potential for interoperability issues assuming multiple
activity, thereby reducing transaction costs for platforms in coexistence (i.e. how to ensure that
all parties ecosystems do not remain closed)

– Digitize bond terms, enabling programmability of – Potential for streamlining/automating all

securities from issuance (replacing document-based processes associated with coupon and principal
manual processes) payments, clearing and settling and/or maintaining
regulatory compliance

– Potential for investors and issuers to interact directly – Issuers could potentially list directly and/or have
with market infrastructure (or with one another) greater transparency of ownership, without relying on
additional intermediaries, reducing costs to issue

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 52
DEBT MARKETS

Platform covering full corporate bond Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

life cycle

Potential path forward

Fragmentation, inefficient processes and limited liquidity Impediments
in secondary markets make end-to-end transformations – DLT-enabled bonds are seen by many issuers,
desirable in corporate bonds. However, this requires investors and intermediaries as experimental, thereby PROJECT SPOTLIGHT
coordination and adaptation across a range of limiting the willingness to be early movers in listing
participants throughout the entire value chain, most of new bonds or investing in the limited supply of
whom do not interact directly in existing markets (e.g. existing securities
issuers, front and back-office staff from multiple business
lines, infrastructure providers, et al.). Nevertheless, – “Chicken and egg” problem: liquidity begets issuance,
many participants and observers believe that a series of which begets liquidity, but without strong incentives to
smart bond issuances by prominent corporates would issue or invest in this market (vs. traditional markets),
significantly increase investor and issuer interest in such both will remain limited SGX/Temasek Marketnode
a platform. Following a successful proof of value co-led by
Example firms/projects SGX, Temasek and HSBC (during which a digital,
Enablers smart contract-based bond was issued and
– Compared to equity markets, generating liquidity is HSBC, Temasek, SGX Status: successful settled on DLT using HSBC’s on-chain payments
less likely to be a significant impediment for bonds, Digital bond issuance and pilot/ proof of value solution), SGX and Temasek announced the
since the alternative is the status quo of fragmented life-cycle management (Sept 2020) creation of a digital asset exchange focusing on
and generally illiquid markets the bond market. Partnering with bond issuance
SIX Digital Exchange Status: in software provider Covalent Capital, the combined
– The successful transition to digital operating models End-to-end digital market production build platform will be an end-to-end solution employing
during the COVID-19 pandemic is likely to encourage infrastructure DLT and smart contracts for relevant value chain
greater openness among financial institutions to components (using Covalent’s existing non-DLT
replacing manual correspondence with digital Bursa Malaysia/Labuan Status: proof of digital issuance platform for book building).52
collaboration platforms Financial Exchange (Project concept
Harbour)
– Availability of CBDCs would likely prompt greater End-to-end digital bond
comfort with DLT among both infrastructure providers issuance, trading, and
and market participants, as CBDCs would allow for depository venue
atomic DvP settlement in central bank money

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 53
DEBT MARKETS

Retail bond issuance and distribution Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

Overview Reimagining

Particularly in emerging markets, financial institutions and secondary markets. By tokenizing bonds and distributing Degree of change
governments are developing solutions to facilitate retail them via a digital platform accessible by retail investors
investor access to corporate and government bonds. (through which bonds can be fractionalized and traded
Improving
Since issuance and trading infrastructure have high fixed with instantaneous, low-cost settlement), issuers can
costs, bond investments often have equally high minimum expand access to a wider group of retail investors.
ticket sizes and transaction costs for primary and
Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Issuance Trading Clearing Settlement Custody Asset servicing

Major changes from current state* There may be regulatory/consumer protection issues Potential paths forward
Establish a platform to facilitate both issuing bonds to be addressed in terms of custody/cryptographic key
directly to retail investors and secondary market trading management, fraud and privacy concerns For jurisdictions with limited retail investor participation
among retail investors, without costs associated with in bond markets, DLT will likely not offer a panacea.
legacy infrastructure and/or intermediaries Example firms/projects However, some governments and financial institutions
may find that DLT provides a low-cost basis for
Proposed benefits* Philippines: Union Bank and Status: proof establishing a retail bond market infrastructure
– Enable a larger population of retail investors to both Standard Chartered of concept without requiring too many intermediaries. In these
own and trade bonds (tokenization platform for retail completed jurisdictions, while most expect the DLT-based retail
corporate bonds) Dec 2020 market to develop separately from wholesale markets,
– Potential to interact with broader financial and digital many believe that if there are significant cost savings
inclusion efforts (e.g. digital identity programmes) Philippines: Union Bank and PDAX Status: in from the new infrastructure, governments and issuers
(Bonds.PH retail government bond production may push for the application of DLT to wholesale bond
Potential risks/challenges distribution platform) build market infrastructures.
Developments are likely to be limited to jurisdictions in
which governments are taking an active stance in favour Thailand: Bank of Thailand Status:
of DLT in financial markets (government savings bond platform) production
scheduled
2021

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 54
DEBT MARKETS

‘Stand-alone’ blockchain bond issuances Issuance / Trading / Full life cycle / Retail distribution / Stand-alone

Overview
“Stand-alone” issuances of “blockchain bonds” have feasibility of establishing a bond with terms codified in
been an important means for financial institutions to smart contracts and have clarified the various roles that
test the underlying technology and prove its value. Most are essential in managing a DLT-listed bond throughout
issuances have been arranged by one bank or a small its life cycle. While, in general, these tests have affirmed
syndicate, with a limited number of investors and limited blockchain’s potential ability to streamline and optimize
secondary market trading. In these experiments, bonds the bond issuance process, they have also underlined the
have either been “mirrored” or simulated on a distributed challenges of ensuring regulatory and legal compliance in
ledger, or they have been fully issued on DLT as the official uncertain regulatory environments, as well as the benefits
record. Across the board, they have proven the technical and challenges of developing solutions collaboratively.

Notable issuances

Lead arranger Issuer Date Comments

Commonwealth Bank of Australia The World Bank 2018 and World Bank issued A$110 million bond on blockchain, with life-cycle events managed through smart
(with RBC and TD Securities for (“Bond-I”) 2019 contracts. Follow-on transaction in 2019, with more investors and additional arrangers/market makers,
2019 issuance) allowed for secondary market transfer on-chain.53

JPMorgan National Bank of 2018 NBC issued a $150 million one-year floating rate note, mirrored/simulated on Quorum blockchain,
Canada with several investors participating in the trial.54

Sberbank MTS 2018 Sberbank placed a RUB 750 billion commercial bond for MTS, a Russian telecom company,
using the National Settlement Depository’s (NSD) blockchain, with the full life cycle managed
through smart contracts.55

Santander CIB Banco Santander 2019 Self-issuance of a $20 million bond on public Ethereum; Santander Securities Services serves as
tokenization agent and custodian (of cryptographic keys), with Santander CIB as dealer. All cash payments
are tokenized.56

Société Générale Société Générale SFH 2019 Self-issuance of €100 million covered bond on public Ethereum blockchain.557

BBVA BBVA 2019 Structured €35 million green bond (earmarked for sustainability efforts) issued to MAPFRE using BBVA
blockchain platform.58

Bank of China (BoC) Bank of China (BoC) 2020 BoC completed the issuance of 20 billion yuan ($2.8 billion) worth of bonds using its proprietary
blockchain system.59

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 55
Securitized Products: summary

Securitized product markets are highly heterogeneous, given

significant differences in the loans underlying mortgage-backed
securities, asset-backed securities, collateralized loan obligations
and other instruments. However, across the board, there are
widely acknowledged inefficiencies associated with manual
processes and limited trust in data between institutions. Beyond
the challenges that are common across other securities markets,
securitized products face a unique set of issues associated with
the fact that these securities effectively bundle the cash flows
and risks of a large number of underlying loans.

While most would agree that there is significant opportunity to

better use technology across the value chain for securitized
products, a number of observers and market participants
believe that DLT may provide unique benefits to these markets.
In particular, DLT-based solutions may enable all relevant
participants in the value chain to access the same data on
underlying loans in real time, thereby reducing the need to verify
and audit data throughout the security life cycle.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 56
SECURITIZED PRODUCTS

Overview of asset class

Market overview
Securitization is the process of converting the cash
flows from illiquid financial credit assets into tradeable The securitized product landscape is highly complex, consisting of participants in underlying loan markets,
securities. As such, securitized products are highly participants in the securitization process and primary market issuance, participants in the secondary markets, and
diverse, but are generally categorized as mortgage- entities involved in lifecycle management for both the loan and the security.
backed securities (MBS, consisting of both residential
and commercial mortgage loans), asset-backed securities
(ABS, consisting of non-mortgage consumer credit,
such as credit cards and auto loans) and collateralized
loan obligations (CLOs, consisting of corporate loans).
Generally, these securities are issued by a bank or a non- Loan origination/ Borrowers/ Loan originators Loan servicers
bank originator, responsible for pooling the exposures, underwriting obligors (e.g. (e.g. banks)
structuring the security and selling to investors. The US home owners)
MBS market, by far the world’s largest, stood at $10
trillion at the end of 2019.60 European MBS, ABS and
CLO markets totalled $1.2 trillion at the end of 2019.61

Arrangers/ Broker-dealers/ Special purpose Investors (asset CSD

Key characteristics Securitization and
sponsors (e.g. derivatives vehicles/entities owners, asset
primary issuance
(pooling loans, establishing banks) counterparties (SPV/SPE) managers)
While the core processes of consolidating loan exposures, SPV, structuring security,
structuring and issuing securities and secondary market issuing security)
trading are consistent across securitized asset classes,
there are fundamental differences in the underlying
loans and in secondary market liquidity and operations.
However, across MBS, ABS and CLOs, there are similar
inefficiencies associated with manual and duplicative
Secondary market Investors (asset Broker-dealers Trading venues Custodians CSD
processes, limited transparency of underlying loans and
owners, asset
associated costs and delays. managers)

Life-cycle
CSD Loan servicers Custodians Trustees Broker-dealers/
management
derivatives
counterparties

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 57
SECURITIZED PRODUCTS

DLT in the securitized products value chain

Primary market Secondary market

Loan origination Security structuring and distribution Trading, clearing and settlement

– Application – Underwriting – Pooling/transferring loans and establishing SPV – Investor due diligence – Trade matching/
A – Processing – Closing B – Structuring, underwriting and rating security C – Price and liquidity confirmation
– Documenting, closing and issuing security discovery – Clearing and settling

Life-cycle management

Security structuring and distribution

– Collecting interest, principal and escrow payments Security servicing

D – Administering and ensuring funds come in
– Tracking/monitoring overdue payments – Holding cash in escrow; monitoring – Ongoing credit monitoring and cash-flow
– Addressing defaults/credit events E collateral modelling
– Distributing payments to investors – Ensuring regulatory criteria are fulfilled
– Managing ongoing swaps/hedges

Opportunities for transformation across the entire value chain

Existing pain points Potential DLT roles in securitized products

Across the value chain, inefficiencies today include: Trading: except in certain MBS, relatively shallow While many digitization efforts could reduce the
C
over-the-counter markets, with constraints inefficiencies in lending and securitization, DLT-based
Origination and underwriting of underlying in liquidity and significant market information systems could provide unique benefits, such as:
A
loans: long lead times; lack of data asymmetry
standardization (contract terms, credit profiles, – Creating an accepted single source of truth on loan
collateral); highly paper intensive; decentralized Loan servicing: manual process to monitor and data, thereby increasing transparency for all parties
D
information and storage; costly to access and collect payments; limited insights offered to and limiting the need for duplicative audits across the
reconcile data investors; fragmented account management value chain

Security structuring: complex, manual and Security servicing: costly due diligence and – Reducing the time and/or level of manual processing
B E
costly processes to evaluate, rate and pool research due to absence of single source of truth; required for settlement of trades, processing payments
loans, which is often duplicated across time lags leading to out-of-date or imperfect and other life-cycle events (via smart contracts)
multiple parties; slow, opaque and manual information; manual/slow reconciliation (time lags
settlement processes between loan payments and investor distributions) – Reducing the need for manual reconciliations
throughout the life cycle of the security

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 58
SECURITIZED PRODUCTS

Summary of emerging use cases

1 2 3
End-to-end origination, Tokenizing loans for servicing Improving security servicing
securitization and servicing and data management through DLT
platform
What? Create a digital representation of a loan What? Develop a DLT-enabled tool to
What? Introduce a DLT-based platform on a DLT platform that can then be used to facilitate better and more efficient servicing of
enabling loan origination, securities issuance, facilitate loan payments and data sharing securitized products and underlying loans
exchange, settlement and servicing processes
on one platform Who? Driven by technology providers to Who? Led by trustees or other service
support loan servicers, investors and other providers involved in servicing securities
Who? Led by third-party technology providers participants in the value chain
and/or bank consortia Why? Enable greater transparency of
Why? Eliminate the need for each party to performance of underlying loans and to
Why? Eliminate the need for each party to reverify each individual loan at every step of automate elements of security servicing
reverify each individual loan at every step of different processes; improve transparency of
different processes; improve transparency of underlying loans (improved risk management)
underlying loans (improved risk management); and flexibility (loans can be brought on or off
reduce reconciliations and complexity in DLT at any point)
operations; potentially reduce capital required to
settle trades

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 59
SECURITIZED PRODUCTS

End-to-end origination, securitization and End-to-end / Loan servicing / Security servicing

servicing platform

Overview
Reimagining
Given inefficiencies across the value chain for many on the securities, accessible by all relevant
securitized products, some firms have focused on end- parties to improve processes associated with trading Degree of change
to-end solutions, bringing together the loan origination, and managing the life cycle of securities. While
securities issuance, exchange, settlement and servicing focused on delivering end-to-end value, the platform
Improving
processes on one platform. While not all relevant can be designed to integrate with other systems for
applications and processes will necessarily be built on a processes that would not necessarily benefit from a
distributed ledger, the basic premise is to create a single distributed ledger or would require transforming an
source of truth on the underlying assets (data, terms and additional complex ecosystem (e.g. an initial loan Narrow focus End-to-end
cash flows) that is connected to a single source of truth issuance or exchange). Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Loan origination Security structuring Trading, clearing, settling Loan servicing Security servicing

Major changes from current state* Proposed benefits* Potential risks/challenges

– Loans are originated on a DLT system, or loan data is – Eliminate the need for auditing/verifying individual loan To benefit, all participants need to acknowledge the
brought onto the chain immediately after origination files at every step for every party (e.g. loan warehousing/ accuracy of the underlying loan terms with limited or
(using a standard data model); all downstream sales, credit enhancements, primary market, trading) no auditing; this will require governance and upfront
transactions are based on this loan data and verification by multiple parties, and, depending on the
associated smart contracts – Transparency of underlying loans for all parties at all jurisdiction, could require regulatory approval
times, enabling investors to better understand risk
– Securities are created as digital assets on a
distributed ledger, enabling both a shared source – Reduce complexity in operations and/or operational
of truth on the security (e.g. terms, ownership) and burdens associated with reconciliation activity, thereby
programmability of securities from issuance (replacing reducing transaction costs for all parties
paper-based manual processes)
– Potential to reduce capital required to fund settlement

– Streamline or automate all processes associated with

coupon and principal payments, clearing and settling,
and/or maintaining regulatory compliance

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 60
SECURITIZED PRODUCTS

End-to-end origination, securitization and End-to-end / Loan servicing / Security servicing

servicing platform

Potential path forward

Given the limited liquidity and inefficient, manual processes Impediments
across the value chain, there is significant potential for – In highly complex markets with heterogeneous
end-to-end transformation in some securitized product underlying assets, end-to-end digitalization will be PROJECT SPOTLIGHT
markets. Since secondary markets are largely fragmented difficult, and potentially of limited value (e.g. CLO
and over-the-counter, a small, minimum-viable ecosystem markets, whose underlying corporate loans are Figure/Provenance securitizations
of relevant institutions could realize value and drive interest often highly bespoke due to both borrower and Figure Technologies has developed an integrated
among investors, which in turn could drive greater demand investor demands) platform for originating mortgages and home
for loans “originated” on DLT among securitized product equity loans, securitizing loans and distributing/
issuers. With significant diversity in securitized product Example firms/projects exchanging securities, using its permissioned
markets, however, some are unlikely to adopt any end-to- blockchain Provenance. In 2020, Figure
end digital solutions without pressure from key institutions Figure Technologies Status: live completed two securitizations, detailing the
(e.g. agency-backed MBS markets in the US) or are DLT-enabled mortgage/ in production efficiencies all parties realized in two white papers.
unlikely to benefit significantly from an end-to-end solution HELOC lending, securities (ongoing These efficiencies included the use of automation
(e.g. CLOs according to many industry participants). issuance, trading and lending, with two through smart contracts (for loan compliance,
servicing platform securitizations warehousing and servicing), the use of stablecoins
Enablers completed) to speed up cash payments and, most
– Markets with greater data standardization (in the terms significantly, the transparency and data certainty
of underlying loans) – or ability to impose standardization Vanguard, Citi, BNY Mellon, Status: successful for all parties, limiting the need for subsequent
on a limited ecosystem of participants – will be more State Street, in partnership pilot announced in audits.63
easily digitized with Symbiont62 June 2020
DLT-enabled platform for
– It may be easier to build a minimum viable ecosystem ABS issuance, settlement,
for securities whose underlying loan originations custody, and servicing (loans
involve a smaller network of participants onboarded after origination)

– Integrations between digital asset trading venues

(and potentially off-chain trading venues) could create
a larger investor base, reducing the likelihood that
limited demand on any individual end-to-end platform
limits issuance

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 61
SECURITIZED PRODUCTS

Tokenizing loans for servicing and End-to-end / Loan servicing / Security servicing

data management

Overview Reimagining

One approach to addressing the lack of transparency at Parties involved in a securitization, subsequent investors Degree of change
the loan level is to create a digital representation of each in the securities and loan servicers are then able to access
loan that can then be used to facilitate loan payments and verified data on the underlying loans without each party
Improving
data sharing. Rather than originating loans directly on a necessarily having to audit the full loan pool at every step.
distributed ledger – which could be challenging given the While the shared data source still creates downstream
fragmentation in participants in underlying loan markets – a benefits throughout the life of the loan, this approach is
tokenized version of the loan is created after origination not focused on applying DLT to address challenges with Narrow focus End-to-end
that then becomes the single source of truth for the loan. securitization or the securities market infrastructure. Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Loan origination Security structuring Trading, clearing, settling Loan servicing Security servicing

Major changes from current state* – Transparency of underlying loans for all parties at all Example firms/projects
– Underlying loans are “onboarded” to a DLT-based times, enabling investors to better understand risk
platform after origination, which becomes the single Liquid Mortgage Status: live in
source of truth on the underlying loans for all parties – Loans can be brought on or off DLT at any point (focused on US mortgage production
(e.g. investors, servicers, borrowers) in their life, depending on the interests of the market, but applicable for
owner/servicer other loan markets)
– While borrowers still interact with their servicers
directly, their payments are recorded by the servicers Potential risks/challenges
on the distributed ledger, ensuring accurate data on To benefit, all participants need to acknowledge the
loan performance accuracy of the underlying loan terms with limited or
no auditing; this will require governance and upfront
Proposed benefits* verification by multiple parties, and depending on the
– Reduce the need for auditing/verifying individual jurisdiction, could require regulatory approval
loan files at every step for every party (e.g. loan
warehousing/ sales, credit enhancements, primary Despite not being end-to-end, benefits would still require
market, trading) bringing a relatively large ecosystem to the platform,
potentially limiting uptake

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 62
SECURITIZED PRODUCTS

Improving security servicing through DLT End-to-end / Loan servicing / Security servicing

Overview
Reimagining
A number of market participants are focused on basic premise is for the party responsible for servicing the
developing DLT-enabled tools to facilitate better and more security and reporting to investors – generally the trustee Degree of change
efficient servicing of securitized products and underlying of the special purpose vehicle that holds the underlying
loans. While these approaches could create efficiencies assets – to use DLT both to ensure greater transparency
Improving
across the value chain, the focus on a relatively of performance and to automate elements of servicing.
narrow slice of services has the potential to enable
faster development of a minimum-viable ecosystem of
participants. These approaches vary somewhat, but the Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Loan origination Security structuring Trading, clearing, settling Loan servicing Security servicing

Major changes from current state* Potential risks/challenges Example firms/projects

– Approach 1: create a DLT-based platform for Could be difficult to achieve validation/consensus on
originators, servicers, trustees and investors with loan terms and other data (such that smart contracts WSFS Institutional Status: prototype in
digital/smart contract representations of loan terms will be accepted) if not built into the issuance/ Services64 development
(e.g. origination and servicing guidelines) securitization process Automate trustee reporting
for ABS (including loan-
– Approach 2: create a DLT-based platform to connect A proliferation of “single sources of truth” could lead level details) and payment
trustee and servicer for managing ongoing servicing to a return to relying on reconciliation between calculations
multiple data sources, thereby limiting the operational
Proposed benefits* efficiencies achieved Wilmington Trust65 Status: prototype in
– Ensure transparency and shared source of truth on Focus on US MBS; DLT development
loan ownership and performance in the event of used to connect loans
defaults or other adverse events, thereby reducing the to origination/ servicing
potential for disputes and/or litigation guidelines to automate reviews
for violations
– Achieve better investor transparency (e.g. faster and
more accurate trustee reports) without having to bring
investors directly onto a shared platform

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 63
Derivatives: summary

Managing derivatives contracts is complex and involves

coordinating activities across several parties. While the industry
has moved somewhat towards digital solutions, many operations
are hampered by inefficiencies, most notably around the need
to reconcile position-related data on an ongoing basis. As a
result, a number of market participants and service providers
have developed or explored a range of DLT-based solutions to
address key inefficiencies and risks, with some already live in
the market. These solutions allow for shared sources of truth
and mutualized processing across ecosystems or within
institutions, including:

– Establishing a shared platform for managing post-trade life

cycle of derivatives across counterparties

– Replacing post-trade infrastructure with a DLT-based system

(in the case of markets with existing central infrastructures)

– Establishing a platform for institutions to manage their

margin- and collateral-pledging workflows across all of
their derivatives counterparties

– Creating a platform for mutualizing the data and workflow for

finalizing derivatives trades

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 64
D E R I V AT I V E S

Overview of asset class

Market overview Loan Trading

Clearing and Settlement, payment
servicing position management and delivery
Derivatives – both forward commitments and contingent
claims – are an essential tool for risk management and
Order originated Order matching – Central novation and – Clearing house
cash-flow smoothing for investors, corporates and Listed/ with broker- on exchange multilateral netting (or bilateral generates
financial institutions. As of year-end 2019, the notional exchange- dealer and netting) of contracts by settlement
amount of outstanding over-the-counter derivatives traded routed to clearing house instructions
globally stood at $560 trillion,66 whereas the gross exchange – Reconciliation of trades for payments/
market value of these contracts was $11.6 trillion.67 The – Daily margining calculations asset transfers (if
notional principal of exchange-traded futures and options Cleared and collateral pledges necessary)
Order originated
stood at $96 trillion.68 Interest rate derivatives dominate –over-the- Bilateral trading managed by clearing house – For credit
with broker-
derivatives markets, representing more than three- counter between broker- – Managing trading party defaults derivatives: life-cycle
dealer, potentially
(OTC) dealer and – Position and trade reporting event processing
quarters of contracts, followed by foreign-exchange- routed to other
counterparty
linked derivatives. While the volume of equity- and dealer through
(often using – Trading parties and derivatives Trading parties initiate
credit-linked derivatives is lower, they are essential tools inter-dealer
electronic or dealers manage open payments or asset
for many investors, with a notional outstanding amount in broker (including
multilateral OTC contracts transfers (if necessary)
the trillions of dollars. Uncleared offsetting
marketplace – Potential for bilateral netting
OTC contracts used
for common – Position and trade reporting
to cancel existing
derivatives)
contracts)
Key characteristics
Derivatives are traded either on exchanges or over-the-
counter (OTC). While exchange-traded derivatives are
always centrally cleared, OTC derivatives may be settled
bilaterally or cleared through a central counterparty.
Exchange-traded derivatives and cleared OTC derivatives Existing pain points Potential DLT roles in derivatives
tend to follow standardized contract terms, whereas
uncleared OTC derivatives are generally more bespoke. – Institutions maintain separate data siloes, requiring – Create a single source of truth on derivatives
While exchanges have long employed electronic ongoing reconciliation and causing substantial errors contracts (post-trade) that can be used to manage
trading, OTC derivatives trading has increasingly moved derivatives position and life cycle
towards electronic platforms. ISDA, which administers – Manual processing associated with continuous valuation
the industry-standard master agreement used in many and maintenance and reporting of ownership records – Automate manual processes and verifications across
OTC derivatives contracts, has developed the Common institutions using smart contracts
Domain Model (CDM) as a common digital representation – Manual processing associated with managing margin
to be used across potential digital transformations in the obligations across systems/depositories
asset class.69
– Global failure rate for OTC derivatives of 2%,
representing significant cost to the industry70

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 65
D E R I V AT I V E S

Summary of emerging use cases

1 2 3 4
Platform for OTC Replatforming Platform managing Platform for exchange-
derivatives post-trade life existing infrastructure collateral for cleared traded derivatives trade
cycle on DLT derivatives life cycle
What? Platform for maintaining a shared What? Replacing existing shared What? Platform that provides real-time What? For buy-side participants and
source of truth accessible by all relevant derivatives infrastructure (e.g. trade visibility into an institution’s margin custodians, streamline the process of
parties on derivatives contracts across data warehouse and life-cycle requirements across derivatives central executing exchange-traded derivatives
the post-trade life cycle, with smart processing system) with a DLT-based counterparties and automates the by creating a shared data platform for
contracts to manage life-cycle activities system, creating a shared source of collateral pledging workflow across CCPs calculating broker fees and automating
truth across parties trade matching and enrichment
Who? Financial institution consortia Who? Led primarily by individual
and/or third-party technology providers, Who? Led by existing infrastructure custodians, but requires integration with Who? Financial institution consortia
with network effects from integrating provider, but likely to require operational derivatives clearing houses and/or third-party technology providers,
more counterparties changes by all clearing participants with network effects from integrating
Why? Increased operational efficiencies more counterparties
Why? Replace manual, independent Why? Reduce operational cost stemming from the end-to-end
bilateral clearing and position and complexity by eliminating automation of collateral workflows and, Why? Minimize trade breaks stemming
management processes with a reconciliation activity and transitioning potentially, optimizing collateral and cash from data discrepancies, enabling greater
mutualized infrastructure and workflow; to a modern infrastructure balances through faster payments and end-to-end automation
reduce the need for ongoing reconciliation capital deployment
while also reducing errors, discrepancies
and complexity

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 66
D E R I V AT I V E S

Platform for OTC derivatives post-trade OTC post-trade / Replatforming / Collateral management / Trade life cycle

life cycle

Overview Reimagining

A number of market participants are focused on basic premise is for the party responsible for servicing the Degree of change
developing DLT-enabled tools to facilitate better and more security and reporting to investors – generally the trustee
efficient servicing of securitized products and underlying of the special purpose vehicle that holds the underlying
Improving
loans. While these approaches could create efficiencies assets – to use DLT both to ensure greater transparency
across the value chain, the focus on a relatively of performance and to automate elements of servicing.
narrow slice of services has the potential to enable
faster development of a minimum-viable ecosystem of Narrow focus End-to-end
participants. These approaches vary somewhat, but the Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Pre-trade Trading Clearing and position management Settlement, payment and delivery

Major changes from current state* Proposed benefits* Potential risks/challenges

– Trades booked digitally to platform using standardized – Reduce the likelihood of errors and discrepancies in – Given the reliance on manual reconciliation to identify
contract terms, verified by parties trade terms and valuation calculations, which likely errors, the magnitude of change management
also reduces the incidence of trade failures required may be substantial
– Platform serves as a single source of truth on
derivatives positions, instead of separate data – Potential to reduce complexity in operations and/or – Parties will need new, robust mechanisms for verifying
sources maintained by each party (with verification operational burdens associated with reconciliation contract terms as trades are booked and smart
via email/phone) activity, thereby reducing operational expenses and contracts established
potentially transaction costs for all parties
– Daily valuation calculations and event processing
conducted automatically based on shared position – Greater transparency of derivatives positions for all
data and shared reference data, thereby minimizing parties, including transparency of calculation logic
the occurrence of discrepancies and reducing the
need for reconciliation

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 67
D E R I V AT I V E S

Platform for OTC derivatives post-trade OTC post-trade / Replatforming / Collateral management / Trade life cycle

life cycle

Potential path forward

Given the highly inefficient alternatives in several OTC Enabler Example firms/projects
derivatives classes, many experts expect specific markets – The roll-out of the ISDA Common Domain Model –
to see a significant transition towards DLT-based platforms. including smart contract-based derivatives contracts Axoni Equity Swap Status: live in
However, others see greater standardization as an end in representations developed by Digital Asset and Platform71 production
itself, where traditional technology solutions can be used to other technical standards developed with market
Shared distributed platform
increase efficiency without significant transformation to the participants and service providers – is likely to serve
for managing equity swaps,
market. Since the CDM is technology-neutral, this debate as a tailwind for digitalization in OTC derivatives
currently used by consortium of
is likely to persist. Key questions remain on whether (and markets (though the transition might be slower
15 major buy- and sell-side firms
how) DLT platforms will integrate with other systems and than expected)
processes. For example, regulatory reporting is viewed as Fragmos Chain72 Status: in
a potentially easy win for streamlining or automating. There – Adoption of DLT-based systems for collateral development
Shared platform for managing
is also the possibility of integrating with payment, collateral management and securities financing may encourage
OTC derivatives post-trade
management and securities settlement systems in order greater openness to DLT solutions for derivatives
processes
to automate more of the value chain (including margin and (assuming some degree of interoperability)
collateral posting and settlement events).
Impediments
– Lack of clarity on regulatory jurisdiction (due to
uncertainty about data domiciling) may limit adoption

– Uncertainty about interoperability between DLT

systems and between legacy and new systems may
slow implementation

– A proliferation of derivatives-focused post-trade

platforms might lead to slower uptake, as institutions
need to adjust complex business processes across
multiple derivatives classes and platforms

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 68
D E R I V AT I V E S

Replatforming existing infrastructure OTC post-trade / Replatforming / Collateral management / Trade life cycle

on DLT

Overview Reimagining

At least one major infrastructure provider is currently ledger system could enable parties to further streamline Degree of change
migrating a component of central derivatives infrastructure operations and reduce costs. In the case of DTCC’s TIW,
to a DLT-based system (DTCC’s Trade Information the centralized database on CDS contracts will transition
Improving
Warehouse, for credit default swaps). While markets for to a distributed ledger system, with the possibility to
standardized derivatives with existing centralized record manage life-cycle events automatically with smart
retention and asset servicing infrastructures (e.g. CDS) contracts. In this case, DLT is one element of a broader
are generally more efficient than others, a distributed upgrade to a more modern, cost-effective infrastructure. Narrow focus End-to-end
Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Pre-trade Trading Clearing and position management Settlement, payment and delivery

Major changes from current state* Potential risks/challenges Example firms/projects

– Establish a shared distributed ledger for derivatives – Challenges associated with moving an entire market
contracts, ensuring all participants have an identical to a new infrastructure, where transition may be DTCC Trade Information Status: in
copy of relevant data on an ongoing basis limited by specific institutions Warehouse Replatforming73 production build,
In partnership with R3, Axoni scheduled to go
– Automate and share workflows across institutions – Challenges associated with integrating with other and IBM, DTCC is replacing live 2022–2023
using smart contracts, for life-cycle/credit events, critical infrastructure/data systems the functionality of the TIW, the
ongoing clearing/netting, and payment calculations primary global infrastructure
for CDS contracts, with a DLT
Proposed benefits* database and smart contracts
– Increase transparency for all participants, potentially
facilitating better risk management

– Potential to eliminate operational burdens associated

with reconciliation activity, or further reduce complexity
in operations, thereby reducing operational expenses
and potentially transaction costs for all parties

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 69
D E R I V AT I V E S

Platform for managing collateral for OTC post-trade / Replatforming / Collateral management / Trade life cycle

cleared derivatives

Overview Reimagining

Several institutions are developing solutions that use institutions. These solutions are narrowly focused on Degree of change
DLT to enable real-time visibility of margin requirements solving the challenges of collateral and margining, but
and automation of the collateral workflow across central they could potentially integrate with other platforms to
Improving
counterparties. While traditionally brokers and custodians create a shared digital record of all aspects of a derivative
need to manually coordinate across a range of different transaction post-trade.
systems to facilitate margin payments – a costly and
time-consuming set of processes – a DLT-based system Narrow focus End-to-end
can allow for faster, synchronized processing across Scope of value change

Value chain components in scope In scope Partially in scope Not in scope

Pre-trade Trading Clearing and position management Settlement, payment and delivery

Major changes from current state* – Better optimization of collateral and cash balances Example firms/projects
– Centralize institution’s visibility of collateral/margin through faster payments and capital deployment,
obligations across derivatives clearing houses potentially reducing the need to prefund margins Baton Systems, in partnership Status: live
with JPMorgan, Citi, SGX and in production
– Further automate margining and collateral workflows – Reduce risks and costs associated with manual other institutions74 (JPMorgan); in
using smart contracts processing Platform focused on automating production build
margin and collateral workflows (Citi, SGX)
– Integrate collateral/payment instructions for derivatives Potential risks/challenges with derivatives clearing houses
central counterparties directly into collateral and – While individual institutions can implement it (without (using integrations into existing
treasury optimization systems the entire market), efficiencies are tied to being able to treasury systems)
integrate as many central counterparties as possible
Proposed benefits* onto the platform Bolsa de Valores de Colombia, Status: in
– Potential for significant operational efficiencies in partnership with Contrato development
stemming from end-to-end automation of – Speed of payments and collateral transfers is still Marco75
collateral workflows limited by existing rails even if data is visible and Platform focused on automating
instructions sent in real-time margin and collateral workflows
for OTC derivatives

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 70
D E R I V AT I V E S

Platform for exchange-traded derivatives OTC post-trade / Replatforming / Collateral management / Trade life cycle

trade life cycle

Reimagining
Overview
Degree of change
Despite operational advantages compared to OTC calculated in real time across participants, trade matching
derivatives, buy-side participants and custodians and enrichment can be automated in real time and
Improving
still face challenges associated with processing and participants can share a distributed ledger for trade
executing exchange-traded derivatives. At least one capture. While such a platform would benefit from
financial technology company is developing a solution network effects, it does not require the entire market to
focused on avoiding trade breaks – which require move (e.g. one asset manager and a custodian could use Narrow focus End-to-end
manual reconciliation and investigation – by creating the platform to realize the proposed benefits). Scope of value change
a shared data platform so that trading fees can be

Value chain components in scope In scope Partially in scope Not in scope

Pre-trade Trading Clearing and position management Settlement, payment and delivery

Major changes from current state* Proposed benefits* Example firms/projects

– Trade capture occurs on a shared ledger, minimizing – Potential to significantly reduce the incidence of trade
the need to match trades across disparate systems breaks, thereby reducing the cost of investigating and STACS Mercury Platform Status: live in
reconciling fails Platform for real-time production
– Broker trading fees are calculated on the platform management of exchange-
using shared data in real time – Increase transparency for counterparties and traded derivatives, currently in
intermediaries in trades use by BNP Paribas Security
– Trade matching and enrichment on same day (or in Services and Eastspring76
real time), with concurrent processing by all parties – Potential to reduce risk via same-day trade matching,
enrichment and clearing

Potential risks/challenges
– While there are clear benefits to a single source of
truth on trade life-cycle data, it will be necessary to
effectively integrate with post-trade systems (DLT-
based or traditional)

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 71
Securities financing: summary

Securities financing transactions – repurchase agreements

and securities lending – have emerged as an area to which
distributed ledger technology may be particularly well suited.
These transactions are often operationally complex, generally
involving an exchange of collateral, cash and some margin.
They also tend to be conducted in a relatively narrow time frame
and to be relatively low-margin lines of business. As such, there
is an interest in solutions that:

– Ease the operational burden associated with

conducting transactions

– Reduce the time required for settlement, as well as the risk

– Allow for better collateral management and mobility

DLT and smart contracts use cases have been developed that
use the features of the technology to achieve these ends, without
requiring a complete end-to-end market transformation (e.g.
issuance of digital securities). As such, many market participants
see the digitalization of these collateral-based transactions as an
enabler of broader market digitalization in future, as institutions
realize benefits while developing comfort with the technology.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 72
SECURITIES FINANCING

Overview of securities financing

transactions

Repurchase agreements Securities lending

Market overview Market overview

A repurchase agreement (or repo) is a form of short-term loan collateralized by securities Securities lending involves the owner of specific securities lending them to another party
(most commonly, US Treasury bonds). In a repo, securities are sold in exchange for cash, in exchange for a fee, with the loan generally being collateralized by other securities or
with an agreement to repurchase the securities at a later time. Most repos are short-term, by cash. As of January 2021, the aggregate volume of securities on loan globally was
with the majority being overnight transactions.77 The average daily volume outstanding estimated at €2.4 trillion, with €24.2 trillion of lendable assets available through securities
for US repos is more than $4 trillion, making the transactions central to many institutions’ lending programmes.80 Generally speaking, securities lending allows asset owners to earn
short-term funding.78 additional return on assets held long-term, while enabling a range of institutions to meet
specific needs.
Key characteristics
The repo market is generally split into bilateral and tri-party repo. In bilateral repos, broker- Key characteristics
dealers directly exchange cash and securities with counterparties (e.g. asset managers, Securities lending is generally facilitated by third-party securities lending agents, primarily
hedge funds or financial institutions). Bilateral repos can be centrally cleared or uncleared. custodian banks but including a range of other institutions.81 These institutions provide
In tri-party repos, a clearing bank or other clearing house serves as an intermediary services to asset owners looking to lend their securities. On the borrowing side, broker-
between the two parties, handling the collateral selection and valuation, margining and dealers generally intermediate on behalf of clients.
processing. While repo deal flow primarily takes place telephonically, there is growing
adoption of electronic solutions.79 Existing pain points
– Rigid restrictions on available windows for transferring assets, often complicated by
Existing pain points time-zone differences, with added difficulties for transferring assets between CSDs
– Institutions lack centralized visibility of their available collateral, which may lead to in different jurisdictions
suboptimal allocation
– Limited visibility of use of lent assets (limited understanding of collateral
– Generally inflexible in terms of settlement times, and the timing and frequency reinvestment risk)
of netting
– Fragmented, manual and inefficient workflows between institutions to facilitate the
– Fragmented, manual and inefficient workflows between institutions to facilitate the exchange of collateral
exchange of collateral

– Lack of transparency between institutions increases collateral requirements, fees and

late delivery charges

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 73
SECURITIES FINANCING

Summary of emerging securities financing

use cases

1 2 3
DLT platform for repurchase Tokenizing loans for servicing Replatforming securities
agreements and data management lending infrastructure

What? Platform for tokenizing and What? Platform for swapping baskets What? Replace infrastructure for securities
immobilizing collateral to be used in repo of securities across depositories and/or lending with distributed ledger network,
transactions, executed via smart contracts jurisdictions, without requiring actual transfer creating a single source of truth for participants
of securities
Who? Led by technology providers or banks, Who? Can be led by existing central
serving all repo participants (e.g. broker- Who? Led by technology provider, custodians infrastructure providers (e.g. central
dealers, banks, tri-party agents) and/or depositories, with need for a network of counterparties) or other parties
custodians, depositories and banks
Why? Enable repos with shorter duration Why? Reduce the need for reconciliation of
(e.g. intraday vs. overnight terms), eliminate Why? Enable better optimization of collateral transaction data, thereby creating operational
failed transactions, reduce need for manual holdings, because securities can be efficiencies and reduction in risk
processing and reconciliation and ensure exchanged in real time, at any time of
greater transparency of life cycle day, at low cost and without additional
operational complexity

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 74
SECURITIES FINANCING

DLT platform for repurchase agreements Repo platform / Securities swaps / Infrastructure

Overview
Despite operational advantages compared to OTC participants can share a distributed ledger for trade Reimagining
derivatives, buy-side participants and custodians capture. While such a platform would benefit from
still face challenges associated with processing and network effects, it does not require the entire market to Degree of change
executing exchange-traded derivatives. At least one move (e.g. one asset manager and a custodian could use
financial technology company is developing a solution the platform to realize the proposed benefits).
Improving
focused on avoiding trade breaks – which require
manual reconciliation and investigation – by creating
a shared data platform so that trading fees can be
calculated in real time across participants, trade matching Narrow focus End-to-end
and enrichment can be automated in real time and Scope of value change

Major changes from current state* Proposed benefits* Potential risks/challenges

– Collateral (eligible securities) are onboarded to – Eliminate the need for reconciliation If parallel systems/platforms are employed as a DLT
the platform; digital representations of collateral between institutions platform is implemented, there is the potential for added
are created operational complexity for some institutions, introducing a
– Reduce operational burden/costs by automating the new source of operational risk
– By securely immobilizing the collateral at the full repo life cycle
custodian using smart contracts, the need to actually
transfer collateral between parties is eliminated – Reduce (or eliminate) the potential for disputes and/or
failed transactions
– Establish a single source of truth on eligible or
available collateral within an institution – Better optimize collateral allocation due to
immobilization and transparency
– Establish a single source of truth on status of repo
transactions throughout the life cycle – Potentially improve overall market liquidity and lower
the cost of secured financing
– Mutualize workflows across institutions; automate
processes through smart contracts

If digital cash is used, payment leg is completed Introduce the ability to complete repos intraday, creating
atomically and instantaneously a new intraday secured financing option

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 75
SECURITIES FINANCING

DLT platform for repurchase agreements Repo platform / Securities swaps / Infrastructure

Potential path forward

The core questions for DLT-based repo platforms are PROJECT SPOTLIGHT PROJECT SPOTLIGHT
about how they will interact with a broader shift in market
infrastructure towards digital securities and cash. Would Broadridge: DLT Repo JPMorgan Chase Onyx: Intraday Repo
wide uptake of a DLT-based repo platform hasten the Broadridge has worked with Digital Asset to develop JPMorgan Chase has developed an intraday repo
move towards a future in which a broader range of asset a DLT-based repo platform for clients (broker-dealers offering, as the first application of its Onyx digital
classes are native digital assets on distributed ledgers? and sell-side firms). The platform has been built to assets platform. By using digital cash built into
Would usage of these systems in turn build comfort with accommodate both intra-company repo and bilateral the Onyx platform, both legs of the repo can be
the technological, legal and regulatory certainty relating repos, with the idea of firms building comfort with settled instantaneously, thereby making it possible
to how DLT-based transactions and contracts work and the system while building a network for bilateral to conduct repos intraday. JPMC serves as the
expectations about flexible and lower-risk settlement? Or repos among existing repo clients. The platform “collateral token agent”, responsible for creating,
would the broad use of such a platform deliver enough does not use digital cash for the cash legs of the immobilizing and transferring the tokenized ownership
operational improvements that core market infrastructures repos, instead integrating with existing payment interest of securities still held at the tri-party agent or
no longer feel overly pressured to innovate? systems (with the possibility to use on-chain cash in custodian. Intraday repo opens up a secured intraday
the future). Given the operational efficiencies, better funding source that did not previously exist. Following
Enablers liquidity and collateral management and reductions in internal pilots and tests with Goldman Sachs and BNY
– Repo markets are fairly concentrated, so a limited risk, Broadridge estimates all parties will realize cost Mellon (as a tri-party agent), the platform is expected
number of participants are needed for a minimum- savings almost immediately, while requiring minimal to launch in 2021.83
viable ecosystem changes to implement. Following pilots with clients,
the platform is expected to launch in 2021.82
– Intra-company repos are used widely to allocate
collateral and liquidity across internal legal entities,
which could represent a “testing ground” for bilateral
and tri-party repos for some institutions

Impediments
– “Chicken and egg” problem: liquidity begets liquidity,
so it is essential that early uptake of a new platform/
product is strong

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 76
SECURITIES FINANCING

DLT platform for securities swaps across Repo platform / Securities swaps / Infrastructure

collateral pools

Overview Reimagining

Despite operational advantages compared to OTC calculated in real time across participants, trade Degree of change
derivatives, buy-side participants and custodians matching and enrichment can be automated in real
still face challenges associated with processing and time and participants can share a distributed ledger
Improving
executing exchange-traded derivatives. At least one for trade capture. While such a platform would benefit
financial technology company is developing a solution from network effects, it does not require the entire
focused on avoiding trade breaks – which require market to move (e.g. one asset manager and a
manual reconciliation and investigation – by creating custodian could use the platform to realize the Narrow focus End-to-end
a shared data platform so that trading fees can be proposed benefits). Scope of value change

Major changes from current state* – Ensure better operational controls and transparency
– Custodians create digital representations of securities,
with baskets “held” by a trusted third party and – Reduce (or eliminate) the potential for fails PROJECT SPOTLIGHT
a distributed collateral registry accessible across
participants (with data controls) – Potentially finance more illiquid assets HQLAX
HQLAX is a technology provider that has
– Collateral baskets to be used in swaps are created Potential risks/challenges developed a securities lending platform to enable
and immobilized, with swaps occurring at a specified Will be essential to ensure that all parties – custodians/ institutions to seamlessly swap the high-quality
day/time on ledger (while underlying collateral stays tri-party agents and underlying asset owners – liquid assets needed to meet the liquidity coverage
with custodians) adapt to the platform as a single source of truth ratio, enabling institutions to better optimize their
on collateral ownership holdings. The platform has onboarded most
Proposed benefits* major European custodians/tri-party agents,
– Enable firms to better optimize securities holdings at If platform is used for narrow/single use within institution, including Euroclear, JPMorgan, BNY Mellon,
precise points in time, minimizing the balance sheet could introduce additional complexity in institution-wide Citi, Clearstream and BNP Paribas. Several
cost of satisfying regulatory ratios collateral management banks have conducted tests or live swaps
using HQLAX, including ING, UBS, Credit
– Reduce intraday credit exposures and/or intraday Suisse and Goldman Sachs.84
capital requirement for traditional collateral transfers

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 77
SECURITIES FINANCING

Replatforming securities lending Repo platform / Securities swaps / Infrastructure

infrastructure with DLT

Overview Reimagining

Some infrastructure providers are developing DLT- – and initially operated – by the clearing house. In another Degree of change
based solutions to digitize operations for traditional approach, a stock exchange is developing a central
securities lending contracts. In one case, a derivatives securities lending platform where one did not exist
Improving
clearing house, which serves as a central counterparty previously. These DLT-based infrastructures will allow all
in securities lending transactions (e.g. loans of stocks), is clearing participants to have a single source of truth with
replacing the underlying infrastructure for settling cleared real-time visibility of securities lending contracts, reducing
securities lending transactions with a permissioned the need for manual reconciliation and enabling broader Narrow focus End-to-end
distributed ledger network. This network will be governed improvements to operations. Scope of value change

Major changes from current state* Potential risks/challenges

– Underlying infrastructure for settling cleared securities There may be challenges with ensuring clearing
lending will be transitioned to DLT (or a new securities participants provide real-time accurate information on PROJECT SPOTLIGHT
lending platform established) securities available for loans, given other markets will still
be running on traditional infrastructure and processes Options Clearing Corporation (OCC)
– Participants who run a network node will have access OCC’s Stock Loan Program allows its clearing
to a single source of truth on stock loans Example firms/projects members to borrow/lend equities (which are
ultimately transferred through the DTC) in which
Proposed benefits* OCC Stock Loan Program Status: in it serves as the central counterparty. In 2020 it
– Greater transparency of transactions in real time production build enlisted Axoni to develop a distributed ledger
network for cleared stock loan transactions,
– Potential to reduce complexity in operations and/or Tel Aviv Stock Exchange Status: in through which clearing members could access
operational burdens associated with reconciliation Blockchain Securities production build a real-time single source of truth on securities
activity, thereby reducing transaction costs for Lending Platform85 lending activities and contracts. Following a proof
all parties of concept in 2019 that included JP Morgan, Bank
JPX Stock Lending and Status: ongoing of America, BlackRock and others, the platform is
– Potential for interoperability with other derivatives or Collateral Management pilot expected to go live in 2022.87
securities infrastructure/systems Platform86

* May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 78
Asset management: summary

Asset management is central to the capital markets ecosystem,

representing a large share of investment dollars globally. In
addition to being very actively involved in the broader markets
that may be transformed by DLT and other technologies, asset
managers themselves – and their service providers – face
inefficiencies and other challenges for which distributed ledgers
and smart contracts may offer solutions. While they vary greatly,
some are focused on:

– Streamlining the client onboarding and fund share

issuance process

– Improving data sharing across specific ecosystem participants

– End-to-end transformation of “back office” asset

management operations

While asset managers have also increasingly offered

cryptocurrency-based products, this section focuses on
solutions aimed at improving operations and client services
across traditional fund products.
Over time, as additional financial assets are tokenized or issued
digitally, the asset management industry may transform further.
Potential innovations could include tokenized fund shares
tied directly to underlying asset pools via smart contracts
and replacement of traditional fund structures with fully
customizable portfolios.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 79
ASSET MANAGEMENT

Overview of asset management landscape

Market overview

Asset managers invest funds on behalf of retail and The asset management landscape is complex, with significant differences across regions. At a high level, the
institutional clients, offering a range of fund products ecosystem supports investors’ purchasing and selling of fund shares, and asset managers’ investments in financial
geared at different client segments. Funds may be markets, with a range of parties providing services:
defined by the asset classes or subclasses they invest
in, by the investment strategies they employ and/or by
the investor base able to participate in them. At the end 'Direct to consumer' model
of 2019, assets under management by asset managers
totalled $89 trillion globally, with significant growth over
the preceding decade. Given the scale of assets invested
by asset managers, they are core to the capital markets. Capital markets ecosystem
Retail investors
Despite strong growth, the asset management industry
faces a set of structural challenges brought on by fee Fund distribution
compression and mounting cost pressures.88 platform
Asset
managers
Broker-dealers/ Exchanges and
Key characteristics market makers infrastructure
providers
The asset management industry is diverse, with significant 'B2B2C' Model
variation in the size of firms and their product offerings.
Custodian
Generally speaking, investors buy shares in one or several banks
funds, either directly or through intermediaries. Funds
Platform providers
invest in public or private markets, relying on broker-
dealers and market makers as trading counterparties. Fund distributors Fund platform Data providers Transfer agents
Custodian banks clear and settle transactions on behalf
of asset managers, and hold these assets in custody, Regulators
Institutional Fund
while also providing value-add services on top (e.g. investors administrators
securities lending and cash management).
Custodians

Clearing house Transfer agents

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 80
ASSET MANAGEMENT

DLT in the asset management value chain

and ecosystem

Fund distribution Investment management

Marketing, sales, client service Portfolio management and trading
Key activities: Marketing, client Key activities: Portfolio modelling/
Front office acquisition, platforms for fund share optimization, scenario analyses, portfolio Across the ecosystem,
investment/trading, customer insights/ stress testing, market research, order inefficiencies today include:
guidance, customer analytics creation and management, trade execution
Distribution and client onboarding inefficiencies
(e.g. slow, manual and duplicative KYC
Client onboarding and reporting Risk, compliance and processes; paper-based processes for fund
support reporting subscriptions etc.)
Key activities: Profiling and onboarding
(risk profiling, KYC/AML), portfolio Key activities: Risk management and Extended clearing and settlement cycles for
Middle office
monitoring and reporting analytics (fund compliance monitoring, fund shares
portfolio simulations), data collection and
aggregation, legal admin duties Separate data siloes maintained by asset
managers, custodians and other parties in the
ecosystem, leading to limited transparency and
Fund share clearing and settlement Custodian services the need to reconcile trades and other activities
Key activities: Fund share order Key activities: Trade reception,
routing, creation/redemption, clearing/ transfer of ownership, asset custody, Manual, error-prone compliance and
Back office regulatory reporting
settlement, reconciliation servicing and accounting, reporting and
account management (corporate action
management, proxy services)

Fund administration
Key activities: Fund set-up/administration, accounting and NAV calculations,
client reporting, transfer agency

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 81
ASSET MANAGEMENT

Summary of emerging DLT use cases in

asset management

Given the central role of asset managers in allocating processes associated with fund accounting and net
capital globally, asset management firms and the asset value calculations. Moreover, new digital-native
ecosystems that service them are likely to be affected asset classes or products are likely to offer new
by any major digitization of specific markets or asset product opportunities to asset managers and their
classes. Faster or more flexible trade settlement, service providers.
shared sources of truth on securities or derivatives
transactions and operational simplification – these Beyond use cases predicated on broader market
changes and others would all have implications for digitization, a range of institutions are developing
fund managers, custodians and fund administrators. solutions designed to address the challenges,
For example, a shared, real-time source of data on all inefficiencies and risks unique to asset and fund
underlying portfolio holdings could greatly simplify the management. These use cases include:

Use case Summary* Potential benefits and challenges Example firms

DLT-based DLT-based distribution platforms focused on Benefits FundsDLT:89 a Luxembourg-based start-up, owned
fund streamlining the operations associated with fund – Reduce inefficient, manual and/or redundant by Clearstream, Credit Suisse, LSE and Natixis,
distribution distribution, linking together the various institutions processes, potentially reducing costs for end has created a DLT platform for improving efficiency
and register involved via a single source of truth – e.g. investors across fund transaction processing. Status: live
platform automating fund register management and fund – Speed up access to fund investment for end
transaction processing, improving client onboarding investors Allfunds Blockchain:90 partnered with ConsenSys
(including sharing of KYC/AML verifications across – Potential for enhanced liquidity in secondary to create a DLT platform that aims to streamline
network participants) and enabling secure data markets communication in the fund distribution value chain.
sharing for other elements of processing Status: in development
Challenges
Calastone Distributed Market Infrastructure:491
– May be challenging to onboard a minimum-
platform aiming to streamline and connect
viable set of participants, particularly with
participants and elements of the fund transaction
multiple networks
process via DLT. Status: live

IZNES:92 platform for subscriptions and redemptions

of European funds, compatible with different
distribution channels, focuses on transaction
processing at the fund-unit level. Status: live

*May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 82
ASSET MANAGEMENT

Summary of emerging DLT use cases in

asset management

Use case Summary* Potential benefits and challenges Example firms

Investor- Consumer/investor-facing, end-to-end platform for Benefits Figure Digital Fund Services:93 Figure
facing tokenized funds. Includes tools for fund origination, – Potential for a wider investor base for some Technologies, a US-based financial technology
end-to-end client onboarding, fund distribution (including back- funds, increasing access and fund liquidity company, has used the Provenance blockchain to
platform for end processes), fund trading and some elements of – Streamline operations for funds, particularly offer an end-to-end blockchain solution for digital
tokenized fund administration valuable for small or private funds with less fundraising and ongoing fund management.
funds complex operations, potentially lowering costs
Status: live
Challenges
– A new distribution model may require
significant client education (not specific to
DLT-based platforms)
– May be challenging to onboard larger funds
reliant on a broader set of ecosystem partners

End-to- DLT-based solution to enable fund creation, fund Benefits FundAdminChain:94 A UK-based start-up, founded
end fund administration and fund servicing, connecting all – Potentially reduce inefficient or redundant by buy-side and DLT experts, in collaboration
distribution, relevant parties through a shared source of truth. processes and reconciliation, possibly reducing with R3, is building a DLT-platform to integrate the
administration The goal is to streamline all processes associated costs for end investors various fund management servicing functions on
and servicing with managing fund operations by mutualizing – Immediate settlement on net asset one platform.
network workflows across relevant parties via smart value availability
contracts, based on a shared source of truth for – Improved compliance and regulatory reporting Status: in development
participants across the fund life cycle – Increased transparency for asset managers
and investors

Challenges
– May be challenging to onboard a minimum-
viable set of participants given the breadth of
activities covered
– Data needs to be standardized across a
wide ecosystem

*May differ by exact model. Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 83
Enablement use cases: summary

While many institutions are focused on directly transforming

specific securities and derivatives markets, others are developing
technology solutions or infrastructure to support digitization
across the capital markets. Still others are developing technology
solutions in adjacent areas in the financial services ecosystem.
Collectively, these use cases may be enablers of transformation
in the capital markets. These include:

– Products developed in areas adjacent to the capital markets,

but upon which many capital markets operations rely (e.g.
wholesale payments)

– Solutions that equip institutions to adapt to a distributed

ledger technology environment (e.g. institutional custody for
digital assets)

– Tools that allow institutions to take full advantage of the

potential benefits of this technology (e.g. digital identity and
document sharing)

These use cases do not fit neatly into asset class buckets, and
in many cases are essential elements of solutions explored
elsewhere in the report.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 84
ENABLEMENT USE CASES

Wholesale payments: facilitating capital

markets digitalization

Since most capital markets transactions involve a cash To date, institutions across the public and private sectors
component, almost all capital markets processes and have explored payments solutions that could integrate
systems have some form of integration with wholesale with securities settlement systems and other market
payments systems. With one of the promises of DLT infrastructure, with experiments and live transactions
being the ability to settle securities trades and other proving a range of models as viable. While this report
transactions atomically – instantaneous delivery vs. does not go into great detail on these developments, they
payment (DvP) – integrations with DLT-based payment tend to fall into one of several categories:
systems, or other real-time cash settlement systems, will
be essential to realizing this benefit.

Wholesale stablecoins Integrations with existing systems Wholesale central bank digital currencies (CBDCs)
Developed by individual firms or consortia, these Public- and private-sector participants have built Several central banks are experimenting with both retail
instruments are a digital token entirely backed by mechanisms for integrating DLT or token-based and wholesale CBDCs, with a number of retail CBDCs
cash reserves. While a number of stablecoins now exist securities with traditional account-based wholesale currently in production globally. Among the central
in different currencies, at least two are designed payment systems. These include tools for sending banks exploring wholesale CBDCs for use in securities
specifically for high-value wholesale transfers between payment messages from DLT-based platforms and direct settlement are the Banque de France, the Hong Kong
financial institutions, including for the purpose of integrations with payments systems: Monetary Authority, the Monetary Authority of Singapore,
securities settlement: the Swiss National Bank and the Bank of Thailand. While
– SWIFT Global Payments Innovation (gpi): platform that experiments have proven that it is possible to settle
– JPM Coin: enables instantaneous payments between will enable DLT-based platforms to initiate payments DLT-based securities trades in central bank money using
JPMorgan clients on a DLT network, with integrations on traditional payments systems97 existing payments systems, many believe that wholesale
with other JPM DLT products/services95 CBDCs will provide market participants with greater
– Direct interface with central bank systems: some comfort in the underlying technology, and therefore serve
– Fnality: consortium of 15 financial institutions building central banks are developing ways to allow DLT-based as a critical enabler for wider adoption and scalability.
a network of local currency DLT-based payment systems to interface with core payments systems.
systems backed by central bank reserves96 For example, one of the features of the Bank of
England’s new real-time gross settlement (RTGS)
system will be some level of interoperability with DLT-
based systems.98 Project Helvetia, between the Swiss
National Bank, BIS and SIX, proved the feasibility of
linking DLT platforms to the existing payment system
for settlement99

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 85
ENABLEMENT USE CASES

Custody services for digital assets

Given the fundamental differences between digital

assets and traditional assets, the concept of “custody”
may, in some ways, be redefined. While one of the early PROJECT SPOTLIGHT PROJECT SPOTLIGHT
claims about a DLT-based capital markets ecosystem
was that service providers such as custodians would be BNY Mellon: digital assets platform Pyctor: distributed custody
disintermediated, the growing institutional investor interest In February 2021, BNY Mellon – the world’s largest Developed by ING Bank in collaboration with several
in bitcoin and other cryptocurrencies has made it clear asset servicer – announced the development of industry partners, Pyctor is an institutional-grade
that not only do asset managers and investors rely on a client-facing digital custody and administration custody and asset transfer infrastructure for digital
custodians to meet regulatory requirements and manage platform for both traditional and digital assets. The assets, including assets issued on the major public
risk, but they will also continue to expect a range of value- platform will allow clients to safeguard, transfer and and private distributed ledgers. Designed for use
add services on top of the standard custody role. The main manage the life cycle of their digital and traditional primarily by custodians, the platform is built with
question now revolves around what custody will look like, assets on one consolidated platform, building upon regulatory compliance and a robust legal framework
from both an operational and a technical perspective. BNY Mellon’s existing frameworks for cybersecurity, at its core. The platform is built as a private,
regulatory compliance and broader risk management. distributed ledger, with validating nodes hosted by
Since digital assets are essentially digital bearer The platform will have value-add services built in, participating institutions, thus offering a decentralized
instruments – meaning that ownership of the including securities lending, collateral management, approach to digital asset custody. The focus is
cryptographic key is considered ownership of the asset – cash management and risk management tools. It will currently on managing institutional digital asset wallets
the way a custodian handles digital assets will differ from be designed to integrate with a range of solutions built for custodians, as well as managing smart contracts
how traditional assets are custodied. From the physical by external technology partners, and over time BNY on behalf of securities issuers.101
systems that must be built to safeguard assets (e.g. Mellon aims to expand the capabilities offered.100
“cold”, offline storage of keys) to the digital integrations
that ensure that custodians and their clients actually
benefit from the unique single source of truth offered by
DLT, financial institutions are developing custody solutions
that build on their relationships of trust with clients.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 86
Conclusion
DLT presents both an opportunity and a threat to Capital markets firms must
continue to hone their strategies
traditional capital markets institutions around this technology
Across the capital markets, executives need a
DLT is not a panacea for the capital markets, but and smart contracts enable the exchange of assets deeper understanding of: 1) how DLT can be
harnessing its unique capabilities could address major without the need for additional complexity, thereby used; 2) how different applications of DLT led by
inefficiencies and challenges. limiting risk and cost for all parties. different parties may ultimately affect aspects of
their business or operations; and 3) what role
While there are many considerations in assessing A few conditions have emerged as critical enablers their firms should play in building, supporting or
whether DLT is the best available technology for successful DLT use cases: challenging DLT-based solutions. While different
for particular use cases,1 there are certain institutions will face different challenges, a general
circumstances in which DLT may offer uniquely – Possibility for standardization: DLT use cases framework for this strategy should include:
powerful benefits: are most valuable when enabling shared sources
of truth across ecosystems, so it is no surprise that Defensive positioning
– Substantial redundancy in low-value-add market-wide standardization of contracts and data Firms must understand where they currently stand
tasks: DLT may offer particularly valuable benefits fields is an important enabler for DLT adoption. Even in the value chain for different markets, whether
in markets or transactions where the lack of a in asset classes or transaction types where common and how those positions may be threatened by
shared source of truth requires multiple institutions standards have not been accepted across the market, DLT-based solutions and whether they wish to
to devote resources to tasks associated with the possibility of introducing broad standards is a maintain those positions. While the approach
data verification. For example, in securitized necessary condition for most use cases. will vary depending on the type of market and
product markets, all actors in the value chain must institution, firms should explore whether to join
independently verify and audit the loans underlying – Minimum-viable ecosystem: In order to get off existing initiatives, partner with other financial firms
a security; a shared source of truth eliminates the the ground, any use case needs a set of relevant to develop solutions or build solutions on their own.
need for additional complete audits throughout the participants on board from inception. For many
life cycle. use cases, the need to reach agreement across a Offensive positioning
larger number of actors has limited the ability to Firms should explore where significant
– Unnecessary complexity and counterparty test solutions and bring them to market. inefficiencies exist that could be addressed by
risk: Some intermediaries play an essential role in Increasingly, firms are shifting from market-wide, DLT-based solutions or where new products
guaranteeing trust in capital markets, but in some consortium-led models to approaches with a may be enabled by features of this technology.
cases, existing market structures require multiple smaller set of participants committed to testing After assessing whether there is white space or
firms to take on significant counterparty credit risk and eventually adopting the solution if economically opportunity in the current competitive landscape,
in the intermediation chain. In many use cases, DLT and technically worthwhile. they can explore paths to developing solutions
independently or collaboratively with relevant firms.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 87
CONCLUSION

DLT is beginning to address real

challenges, but there is no agreed-upon
path for market-wide adoption

DLT is moving from experimentation …but market participants are still The coming years are
to commercialization across far from adopting this technology
asset classes, value chains and at scale likely to see increasing
jurisdictions… digitization of markets,
In a range of proofs of concept and live experiments,
Shifting value pools
DLT solutions offer opportunities for automation and the including more DLT
DLT has proven capable of addressing core inefficiencies potential to shift roles in the capital markets ecosystem,
in the capital markets, including both operational which will likely lead to value migrating among participants use cases going live.
inefficiencies and balance sheet management limitations. and service providers, across the buy-side and sell-side
and between incumbent players and new entrants. This Nevertheless, there is
While this technology offers a consistent set of benefits, has led to both general uncertainty about the technology
firms are building solutions that take very different for many incumbents, and a complex patchwork of still little market-wide
approaches to solving market challenges: some are end- initiatives reflecting very different end-state visions.
to-end solutions reinventing the entire value chain, while
others aim to improve existing processes. Network effects
agreement on how
Reflecting growing comfort with some jurisdictions’
Most DLT use cases attempt to establish ecosystems
that enable participants to realize the benefits of shared
DLT will ultimately be
frameworks for regulation and the legal certainty of
smart contracts, firms have started to bring DLT use
data; as such, network effects are significant. Without a
coordinated approach among market participants – either
used and whether it will
cases to market. to use a particular platform, or to enable interoperability
between platforms – individual platforms may struggle
fundamentally reshape
with attracting both securities issuers and investors.
all elements of the
Parallel infrastructures
In some cases, a DLT-based solution may introduce capital markets.
new costs and risks, given the need to run parallel
operations to support multiple infrastructures. Without
clear roadmaps to harmonizing operations – or solutions
that allow relevant parties to bridge new and old systems
operationally – many firms may be less willing to adopt
DLT solutions at scale in existing asset markets, preferring
instead to focus on those without legacy infrastructures.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 88
CONCLUSION

Fundamentally transforming markets will

require new ways of thinking and working
across the industry

Today’s capital markets are rife with industry-wide an opportunity to fundamentally reimagine how the
inefficiencies and limitations. In the long term, DLT- capital markets operate, perhaps a once-in-a-generation
enabled solutions may or may not be at the core of opening. Making progress on these challenges will
addressing these challenges. However, the emergence require action, collaboration and innovative thinking
of these solutions – and the competitive pressures from from many parties, regardless of which technologies
new entrants and migration of value pools – presents are ultimately used.

Standardization Breaking down siloes Regulatory engagement

Global industry associations and standard-setting bodies Innovative capital markets firms must work outside of Many regulators have shown an openness to digital
must continue to develop common market-wide data traditional organizational siloes to ensure that they are experimentation in the capital markets. Regulators
standards, model contracts and other taxonomies, able to deliver the kinds of technology-enabled products should continue to fine-tune approaches that encourage
in partnership with representative industry actors and and services that deliver real value to clients. Front office innovation while mitigating risks to markets and investors
technology service providers. Industry-wide efforts to vs. back office, technology vs. business, fundamentally – including setting guardrails that help the industry
introduce and adopt standards and replicable models will different systems for different asset classes: these siloes consolidate on future visions – and they should attempt
help reduce inefficiencies and help ensure that firms and have developed in line with economic realities, regulation to mitigate the risk of global fragmentation by working
markets will be able to make the best technology choices and technical limitations, but they likely limit firms’ together at a global level. As new solutions with very
available. Adoption of standards is likely to continue as ability to explore truly transformational opportunities. At different risk profiles are developed, regulators must
an enabler for DLT and smart-contract-based solutions, an industry level, they contribute to the challenges of be open to rethinking traditional frameworks aimed
but broader use of standards in more asset classes and coordinating around a common vision. at regulating both institutions and activities. As new
transaction types is also likely to have significant efficiency regulatory standards are developed, firms must be
benefits regardless of what technologies are used. proactive and transparent in engaging regulators early in
transformation efforts.

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 89
CONCLUSION

Open questions and future

research agenda

There are many open questions as firms

continue to navigate the uncertain future of
capital markets technology While this report focuses on
developments in today’s public
Investor demand Global divergences capital markets, there are other
areas where further ecosystem-
– Will institutional and retail investor interest in – Will jurisdictions with less developed and complex
cryptocurrencies translate into demand for digital- markets continue to be early adopters of DLT-based
wide exploration is needed
native securities? Will growth in DeFi applications spill solutions?
into the mainstream capital markets? Private capital markets
– How will firms with global operations apply lessons While this paper touched on developments in
– Will investors expect a fundamentally different learned in different markets? private markets (e.g. developments in markets
experience with digital securities (vis-à-vis traditional for private equity tokens), open questions remain
securities markets)? around how these markets will adapt to DLT and
other technologies. Looking ahead, as private
– How will banks and other intermediaries ensure that markets continue to grow in importance, there are
this demand reaches issuers? many questions about how DLT may contribute
to a blurring of some lines between public and
private markets.

Regulatory questions Path forward Sustainable finance

Green bonds, carbon credit markets and other
– How will DLT-based technology solutions interact – How will firms effectively manage parallel operations opportunities for linking sustainability-related data
with data privacy and localization policies? How for different infrastructures and begin sunsetting to financial instruments will all be increasingly
can solutions be built to ensure data privacy legacy systems? important as the capital markets help finance the
considerations are maintained without limiting the transition to net-zero economies. While there has
global reach essential to today’s capital markets? – How will the potential emergence of DLT-based been discussion about the potential use of DLT to
CBDCs and other payment systems shift how firms facilitate these activities and products, this is an
– How can regulators work together to ensure view DLT in the capital markets? area ripe for further dialogue and analysis.
that fragmentation in approaches to DLT regulation
does not limit innovation or the development of
global markets?

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 90
Contributors
Steering committee
The following senior leaders provided guidance, oversight and thought leadership for this initiative.

Michael Bodson Kaj Burchardi Alex Cesari Roy Choudhury Lisa O’Connor Zoë Evans
President and Chief Managing Director Chief Technology Officer, Managing Director Global Head, Capital Head of Investment Bank
Executive Officer, and Head of Platinion Refinitiv (through January and Partner, Boston Markets Strategy, Technology, UBS
The Depository Trust & Netherlands, BCG Platinion 2021) Consulting Group SWIFT (through March
Clearing Corporation 2021)
(DTCC) Chief Information Officer,
Data and Analytics, London Head of Post-Trade
Stock Exchange Group Change, HKEX (Apr.
(January 2021-present) 2021-present)

Tim Grant Blythe Masters Vijay Mayadas Simon McNamara Jean-Marc Mercier
Head of SIX Digital Chief Executive Officer, President, Capital Markets, Group Chief Vice-Chairman,
Exchange (SDX), SIX Group Motive Capital Corp and Broadridge Financial Administrative Officer, Capital Markets, HSBC
Industry Partner, Solutions NatWest Group
Motive Partners

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 91
CONTRIBUTORS

Working group
The following senior leaders provided guidance, oversight and thought leadership for this initiative.

Emmanuel Aidoo Bob Baksa Horacio Barakat Simona Catanescu Glen Fernandes Hervé Francois
Head of Digital Assets Principal, Head of Digital Innovation for Director, Capital Markets Group Strategy, Euroclear Blockchain Initiative Lead
Markets, Credit Suisse BCG Platinion Capital Markets, Broadridge Strategy, SWIFT and Chief Executive Officer,
Financial Solutions Pyctor, ING Group

Luc Froehlich Mathew McDermott Christine Moy Benjamin Nadareski Jennifer Peve Lukas Petrikas
Global Head of Investment Global Head of Digital Global Head, The Liink Global Corporate Managing Director, Business Managing Director and Co-
Directing, Fixed Income, Assets, Goldman Sachs Network & Blockchain, Development, SIX Digital Innovation, The Depository Head, HKEX Innovation Lab,
Fidelity International Onyx by J.P. Morgan Exchange (SDX), SIX Group Trust & Clearing Corporation Hong Kong Exchanges and
(DTCC) Clearing Limited (HKEX)

Marc Sterman Eleanny Wernecke John Whelan Andrew Wong

Managing Director, Managing Director, Managing Director of Digital Director, APAC Strategy,
BCG Platinion BCG Platinion Investment Banking, Banco UBS
(from January 2021) (through January 2021) Santander

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 92
CONTRIBUTORS

Members of the project team

The World Economic Forum is grateful to Boston Consulting Group for their commitment
to, and generous support of, this initiative.

Report authors
World Economic Forum
Ben Weisman, Lead Author, Initiative Lead, Financial Innovation
For feedback or questions, please contact [email protected]

Boston Consulting Group

Sarah Zacharias, Project Fellow and Principal, BCG Platinion

Project leadership
World Economic Forum
Matthew Blake, Head of Shaping the Future of Financial and Monetary Systems

Drew Propson, Head of Technology and Innovation in Financial Services

Boston Consulting Group

Kaj Burchardi, Managing Director and Head of BCG Platinion Netherlands

Roy Choudhury, Managing Director and Partner

Eleanny Wernecke, Managing Director (through January 2021)

Additional thanks
The project team expresses gratitude to the following individuals for their support,
contributions and reviews:

Emina Ajvazoska, Meagan Andrews, Derek Baraldi, Mary Emma Barton, Andre Belelieu,
Sumedha Deshmukh, Aylin Elci, Manuela Fulga, Lauren Garry, Madeleine Hillyer, James
Holmes, Kai Keller, Nicole King, Ashley Lannquist, Elizabeth Mills, Alison Moore, Haleh
Nazeri, Sophie Slesinger, Jean-Philippe Stanway, Linda Walsh, Sheila Warren

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 93
Acknowledgements
The project team would like to express its gratitude to the following subject-matter experts who contributed their valuable perspectives through interviews and by
participating in workshops and roundtable discussions. In alphabetical order:

Gaurav Aggarwal, HSBC Vincent Clause, Euroclear Malte Holzberger, UBS

Rehan Ahmed, Singapore Exchange (SGX) Carlo Cocuzzo, ING Group Matthew Homer, New York Department of Financial
Poonam Ahuja, Commerzbank Elizabeth Cohen, Invesco Services
Amar Amlani, Goldman Sachs Michael Coletta, London Stock Exchange Group Glenn Hutchins, North Island
Chris Baldwin, FundAdminChain Bryan Comis, Boston Consulting Group Jin Jeong, Apis Partners
Mohua Banerjee, Infosys Bob Crozier, Allianz Mandar Joshi, Infosys
Horacio Barakat, Broadridge Financial Solutions Savino Damico, Intesa Sanpaolo Sumitra Karthikeyan, Boston Consulting Group
Chris Becker, Investec Olivier Dang, Nomura Lory Kehoe, BNY Mellon
John Beeston, FundAdminChain Guillaume Dechaux, ConsenSys Christopher Kiew-Smith, Standard Chartered
Marc P. Bernegger, Crypto Finance Group Michael Demissie, BNY Mellon David Kinitsky, Circle
Peter Bollhalder, Bank Julius Baer Dave Dowsett, Invesco Steven Kok, Boston Consulting Group
Andreas Borg, Custodigit Ben El-Baz, HashKey Digital Asset Group Alan Konevsky, tZERO Group
Daniel Bosman, TD Bank Group Debbie Evans, Digital Asset Holdings Sebastian Kraft, Commerzbank
Stefan Bosshard, SIX Group Ian Ferreira, Liquid Mortgage Bernhard Kronfellner, Boston Consulting Group
Olivier Bouteille, Natixis James Fierro, ECO Capacity Exchange Carlos Kuchkovsky, BBVA
Jesper Brams, Nasdaq Jean-Baptiste Gaudemet, Finastra Elvie Lahournère, Natixis
Paolo Brignardello, FundsDLT Arie Gerszt, Swiss State Secretariat for Veronica Lange, UBS
Julia Bronson, Paxos International Finance Greg Lee, Paxos
Maan Bsat, Finastra Bill Gilbert, NatWest Group Sandra Lee, Federal Reserve Bank of New York
Martin Burgherr, SYGNUM Sophie Gilder, Commonwealth Bank of Australia Lei Ming, CCB Fintech
Oliver Bussmann, Bussmann Advisory Cédric Gillerot, Euroclear Mark Lewellen, Deutsche Bank
Caroline Butler, BNY Mellon Vanessa Grellet, ConsenSys Antony Lewis, Temasek International
Mike Cagney, Figure Aaron Gwak, Standard Chartered Kevin Lim, Temasek International
Erika Carnogoy, Commonwealth Bank of Australia Kevin Hanley, NatWest Group Darius Liu, iSTOX
Amy Caruso, International Swaps and Liu Hao, China Minsheng Banking Corporation Frank Liu, OneConnect
Derivatives Association Oli Harris, Goldman Sachs Tyrone Lobban, JPMorgan Chase
Sam Chadwick, UBS Jonathan Hayes, Bank Julius Baer Laura Loh, Temasek International
Boon-Hiong Chan, Deutsche Bank Hanna Helin, Refinitiv Limited William Lovell, Bank of England
Alastair Chilton, NatWest Group Robert Hershy, Figure Technologies Ryan Lovell, Vanguard
Anne Chone, European Securities and Markets Authority Peter Hiom, Australia Securities Exchange (ASX) Stephane Malrait, ING Group
Chris Clason, Digital Asset Holdings Peter Hofmann, Custodigit Mike Manning, Symbiont

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 94
ACKNOWLEDGEMENTS

Lena Mass-Cresnik, Moelis & Company Nick Short, HQLAx Danny Wong, Allianz
Kelly Mathieson, Digital Asset Holdings Ishan Singh, Axoni Haimera Workie, Financial Industry Regulatory
Andrew McCormack, Bank for International Manmohan Singh, International Monetary Fund Authority (FINRA)
Settlements (BIS) Tuhina Singh, Propine Global Yao Yuan, Dalian Commodity Exchange
Brian McNulty, FundAdminChain Ben Singh-Jarrold, R3 Thomas Zeeb, SIX Group
Eugene K. Meintjes, UBS Puneet Singhvi, Citi Peter Zhou, The World Bank
Juan Melillo, Banco Nacional de Panamá (Banconal) Sophie Slesinger, BCG Platinion Joe Ziccarelli, Symbiont
David Mirzazadeh, Goldman Sachs Ian Sloyan, International Swaps and Ulrich Zier, Boston Consulting Group
Robert Mitchnick, BlackRock Derivatives Association Xiaonan Zou, UBS
Jennifer Mitrenga, Figure Technologies Ekaterina Sokolova, BNY Mellon Neil Sheppard, Diginex
Sopnendu Mohanty, Monetary Authority of Singapore Neil Sorathia, Hong Kong Exchanges and Clearing Rohan Sherrard, Nasdaq
Kristin Moore, WSFS Financial Corp Limited (HKEX)
Naveed Nasar, agora digital capital markets Florian Spiegel, FinFabrik
Melissa Netram, US Commodity Futures Brian Steele, Goldman Sachs
Trading Commission Nicolas Steiner, Invesco
Maria Newport, Goldman Sachs Rich Steiner, Royal Bank of Canada (RBC)
David Nicol, LedgerEdge Jean-Marc Stenger, Société Générale
Ruben Nieto, Allfunds Patrick Stettler, SIX Group
Matthias Obrecht, Swiss Financial Market Guido Stroemer, HQLAx
Supervisory Authority Valerie Szczepanik, US Securities and Exchange
Gorazd Ocvirk, SYGNUM Commission (SEC)
Jamie O’Malley, ING Group Jeslyn Tan, Deutsche Bank
Federico Orsi, Intesa Sanpaolo Danny Toe, iSTOX
Robert Patalano, Organization for Economic Wee Kee Toh, Monetary Authority of Singapore
Cooperation and Development (OECD) Teruhiko Tokuno, Nomura
Steve Pawlowski, Fannie Mae Johan Toll, Nasdaq 
Guenther Poettler, Boston Consulting Group Jim Tomasello, Fannie Mae
Sunil Raveendran, Allianz Brian Trackman, US Commodity Futures
Ciaran Roddy, HSBC  Trading Commission
Dotun Rominiyi, London Stock Exchange Group Stefan Traenkle, Swiss State Secretariat for
Shubh Saumya, Boston Consulting Group International Finance
Kristian Schneider, Deutsche Bank Rajeev Tummala, HSBC
Michael Schnurr, Bank of Montreal Emily Turner, Citi
Aki Scholl, NatWest Group Kevin Turner, HSBC
Greg Schvey, Axoni Drew Van der Werff, Goldman Sachs
Simon Seiter, Deutsche Börse Martijn van Eck, ING Group
Anton Semenov,Main Incubator, Commerzbank Group Dominique Velter, Compagnie Financiere Tradition
Chris Senzel, BCG Platinion Karthikeyan Vuyyala, HSBC 
Nikhil Sharma, JPMorgan Chase Naresh Vyas, NatWest Group
Peter Shen, Singapore Exchange (SGX) Jason Webb, Fidelity International
Neil Sheppard, Diginex Adam White, Bakkt
Rohan Sherrard, Nasdaq Jon Williams, Refinitiv Limited

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 95
Endnotes
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in-2022/ (link as of 8/4/21). of 8/4/21).

10 Adapted from World Economic Forum, “Redesigning Trust: Blockchain Deployment Toolkit”, 19 Reuters, “ConsenSys Acquires JPMorgan’s Blockchain Platform Quorum”, 25 August 2020:
March 2021: https://widgets.weforum.org/blockchain-toolkit/pdf/WEF_Redesigning_Trust_ https://www.reuters.com/article/us-jpmorgan-consensys-quorum/consensys-acquires-jpmor-
Blockchain_Deployment%20Toolkit.pdf (link as of 9/4/21). gans-blockchain-platform-quorum-idUSKBN25L1MR (link as of 8/4/21).

11 Adapted from World Economic Forum, “Redesigning Trust: Blockchain Deployment Toolkit”, 20 Finextra, “SGX and Temasek to Develop Blockchain-Based Digital Asset Trading Infrastruc-
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12 Forbes, “Satoshi & Company: The 10 Most Important Scientific White Papers In Development 21 PRNewsWire, “ASX Selects Digital Asset to Develop Distributed Ledger Solutions for the
Of Cryptocurrencies”, 13 February 2021: https://www.forbes.com/sites/ninabambyshe- Australian Equity Market”, 21 January 2016: https://www.prnewswire.com/news-releases/
va/2021/02/13/satoshi--company-the-10-most-important-scientific-white-papers-in-develop- asx-selects-digital-asset-to-develop-distributed-ledger-solutions-for-the-australian-equity-mar-
ment-of-cryptocurrencies/?sh=19236f7c2057 (link as of 8/4/21). ket-300208148.html (link as of 8/4/21).

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 96
ENDNOTES

22 LedgerInsights, “DTCC’s Multi-Trillion-Dollar DLT Platform to Launch Late 2022 at Earliest”, 33 The Medium, “CBDC Developments Around the World in 2020”, 31 December 2020: https://
February 2021: https://www.ledgerinsights.com/dtccs-multi-trillion-dollar-dlt-platform-to- medium.com/the-blockchain-policymaker/cbdc-developments-around-the-world-in-2020-
launch-late-2022-at-earliest/ (link as of 8/4/21). 7b649a5dc73b (link as of 8/4/21).
23 World Bank, “World Bank Prices First Global Blockchain Bond, Raising A$110 Million”, 23 Au- 34 CoinDesk, “US Federal Regulator Says Banks Can Conduct Payments Using Stablecoins”, 4
gust 2018: https://www.worldbank.org/en/news/press-release/2018/08/23/world-bank-pric- January 2021: https://www.coindesk.com/occ-banks-stablecoin-payments (link as of 8/4/21).
es-first-global-blockchain-bond-raising-a110-million#:~:text=WASHINGTON%2FSYD-
35 TechCrunch, “Coinbase Is Opening the First Regulated Bitcoin Exchange in the US”, 25
NEY%2C%20August%2023%2F,cycle%20using%20distributed%20ledger%20technology
January 2015: https://techcrunch.com/2015/01/25/coinbase-us-bitcoin-exchange/?guc-
(link as of 8/4/21).
counter=1&guce_referrer=aHR0cHM6Ly9zZWFyY2gueWFob28uY29tLw&guce_referrer_
24 SIX, “SIX to Launch Full End-to-End and Fully Integrated Digital Asset Trading, Settlement sig=AQAAAE0gqo7kJz2ODEaExi4w0aFQbEWVFUttcJIl6yCaXFqRVkbaiVd8sPx3tkESjUzXc-
and Custody Service”, 6 July 2018: https://www.six-group.com/en/newsroom/media-releas- UUs3tUVc_9XIwe0wvFMHTwXdWlP4MTyPe0BeK_OswYdm3nmwQwdu8xS-L4hRNrqnxD-
es/2018/20180706-six-digitalexchange.html (link as of 8/4/21). fLdZg_F3cq1RALUTfQb9uHScCK5GVthOKXCFm-pX- (link as of 8/4/21).
25 Nasdaq, “A $200 Million Pizza! Here’s How Bitcoin Made That Possible …”, 2 December 36 Monetary Authority of Singapore (MAS), “Consultation Paper on a New Omnibus Act for the
2020: https://www.nasdaq.com/articles/a-%24200-million-pizza-heres-how-bitcoin-made- Financial Sector”, 21 July 2020: https://www.mas.gov.sg/-/media/MAS/News-and-Publica-
that-possible-...-2020-12-02 (link as of 8/4/21). tions/Consultation-Papers/2020-July-Consultation-on-FSMA/Consultation-Paper-on-a-New-
26 FBI, “Manhattan US Attorney Announces Seizure of Additional $28 Million Worth of Bitcoins Omnibus-Act-for-the-Financial-Sector.pdf (link as of 8/4/21).
Belonging to Ross William Ulbricht, Alleged Owner and Operator of ‘Silk Road’ Website”, 37 Library of Congress, “Regulatory Approaches to Cryptoassets: Singapore”: https://www.loc.
25 October 2013: https://archives.fbi.gov/archives/newyork/press-releases/2013/man- gov/law/help/cryptoassets/singapore.php (link as of 8/4/21).
hattan-u.s.-attorney-announces-seizure-of-additional-28-million-worth-of-bitcoins-belong-
38 Reuters, “Germany Paves Way for Electronic Securities to Reap Blockchain Fruits”, 16
ing-to-ross-william-ulbricht-alleged-owner-and-operator-of-silk-road-website (link as of
December 2020: https://www.reuters.com/article/germany-bonds-crypto-currency/germa-
8/4/21).
ny-paves-way-for-electronic-securities-to-reap-blockchain-fruits-idUKKBN28Q1A0?edition-re-
27 CoinDesk, “Billionaire Warren Buffett Calls Bitcoin ‘Rat Poison Squared’”, 7 May 2018: https:// direct=uk (link as of 8/4/21).
www.coindesk.com/billionaire-warren-buffett-calls-bitcoin-rat-poison-squared (link as of
39 Global Government Forum, “German Blockchain Strategy Aims to Head Off ‘Stablecoin’
8/4/21).
Currencies”, 10 October 2019: https://www.globalgovernmentforum.com/german-block-
28 CNBC, "J.P. Morgan Is Rolling Out the First US Bank-Backed Cryptocurrency to Transform chain-strategy-aims-to-head-of-stablecoin-currencies/ (link as of 8/4/21).
Payments Business”, 14 February 2019: https://www.cnbc.com/2019/02/13/jp-morgan-is-
40 Coindesk, ”China’s Congress Passes Cryptography Law, Effective Jan. 1, 2020”, 26 Oc-
rolling-out-the-first-us-bank-backed-cryptocurrency-to-transform-payments--.html (link as of
tober 2019: https://www.coindesk.com/chinas-congress-passes-cryptography-law-effec-
8/4/21).
tive-jan-1-2020 (link as of 8/4/21).
29 NPR, “Facebook Announces Plans for Libra, Its Own Cryptocurrency”, 18 June 2019: https://
41 Library of Congress, “China: Rules on Blockchain-Based Information Services Issued Requir-
www.npr.org/2019/06/18/733809352/facebook-announces-plans-for-libra-its-own-cryptocur-
ing Authentication of Users’ Real Identities”, 12 February 2019: https://www.loc.gov/law/for-
rency (link as of 8/4/21).
eign-news/article/china-rules-on-blockchain-based-information-services-issued-requiring-au-
30 PayPal, ‘PayPal Launches New Service Enabling Users to Buy, Hold and Sell Cryptocurrency”, thentication-of-users-real-identities/ (link as of 8/4/21).
21 October 2020: https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-
42 Swiss Fintech Innovations, “Blockchain/DLT legislation in Switzerland”, 25 June 2019: https://
Service-Enabling-Users-to-Buy-Hold-and-Sell-Cryptocurrency (link as of 8/4/21).
swissfintechinnovations.ch/value-rights-as-a-legal-framework-for-the-token-economy/ (link as
31 Circle, “Circle Announces Partnership with Visa to Bring the Benefits of Stablecoins to Busi- of 8/4/21).
nesses Worldwide”, 3 December 2020: https://www.circle.com/blog/circle-announces-part-
43 LedgerInsights, “Swiss Pass Law Supporting Blockchain Registries for Security Tokens”,
nership-with-visa-to-bring-the-benefits-of-stablecoins-to-businesses-worldwide (link as of
October 2020: https://www.ledgerinsights.com/swiss-pass-law-supporting-blockchain-regis-
8/4/21).
tries-for-security-tokens/ (link as of 8/4/21).
32 CNBC, “Bitcoin Surpasses $50,000 for First Time as Major Companies Jump into Crypto”, 16
February 2021: https://www.cnbc.com/2021/02/16/bitcoin-btc-price-hits-50000-for-the-first-
time.html (link as of 8/4/21).

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 97
ENDNOTES

44 US Securities and Exchange Commission,“SEC Issues Statement and Requests Comment 58 BBVA,“BBVA Issues the First Blockchain-supported Structured Green Bond for MAPFRE”, 19
Regarding the Custody of Digital Asset Securities by Special Purpose Broker-Dealers”, 23 February 2019: https://www.bbva.com/en/bbva-issues-the-first-blockchain-supported-struc-
December 2020: https://www.sec.gov/news/press-release/2020-340 (link as of 8/4/21). tured-green-bond-for-mapfre/ (link as of 8/4/21).
45 Ledger Insights, “Security Token IPO for INX Is Unconventional in Numerous Ways”, August 59 Ledger Insights, “Bank of China Issues $2.8 Billion Bonds Using Blockchain”, 2020: https://
2020: https://www.ledgerinsights.com/security-token-ipo-inx/ (link as of 8/4/21). www.ledgerinsights.com/bank-of-china-blockchain-bond-issuance/ (link as of 8/4/21).
46 US Securities and Exchange Commission, “Joint Staff Statement on Broker-Dealer Custo- 60 SIFMA, “Fixed Income Outstanding”, 2021: https://www.sifma.org/resources/research/fixed-
dy of Digital Asset Securities”, 8 July 2019: https://www.sec.gov/news/public-statement/ income-chart/ (link as of 8/4/21).
joint-staff-statement-broker-dealer-custody-digital-asset-securities (link as of 8/4/21).
61 AFME, “AFME Securitisation Data Report Q3 2020”, 10 December 2020: https://www.afme.
47 SIFMA, “2020 Capital Markets Fact Book”, 2020: https://www.sifma.org/wp-content/up- eu/Publications/Data-Research/Details/AFME-Securitisation-Data-Report-Q3-2020 (link as of
loads/2020/09/US-Fact-Book-2020-SIFMA.pdf (link as of 8/4/21). 8/4/21).
48 ASX, Chess Replacement: https://www2.asx.com.au/markets/clearing-and-settlement-servic- 62 Ledger Insights, "Vanguard, BNY Mellon, Citi, State Street Complete Blockchain Pilot for Asset
es/chess-replacement (link as of 8/4/21). Backed Securities", June 2020: https://www.ledgerinsights.com/blockchain-asset-backed-se-
curities-abs-vanguard/ (link as of 8/4/21).
49 HKEX, “HKEX Synapse FAQ”, November 2020: https://www.hkex.com.hk/-/media/HKEX-Mar-
ket/Mutual-Market/Stock-Connect/Reference-Materials/Synapse/HKEX-Synapse-Operation- 63 Provenance Blockchain, "Securitization on Provenance: Saluda Grade (GRADE 2020-FIG1)",
al-FAQ-(Nov2020).pdf?la=en (link as of 8/4/21). 2020: https://www.datocms-assets.com/31876/1600818781-securitization-white-paper-
grade-2020-fig1.pdf (link as of 8/4/21).
50 SDX, “SDX: What We Do”: https://sdx.com/#what-we-do (link as of 8/4/21).
64 Ledger Insights, “WSFS to Use Blockchain for Asset-Backed Security Services”, March 2020:
51 SIFMA, “2020 Capital Markets Fact Book”, 2020: https://www.sifma.org/wp-content/up-
https://www.ledgerinsights.com/blockchain-asset-backed-securities-wsfs-intain/ (link as of
loads/2020/09/US-Fact-Book-2020-SIFMA.pdf (link as of 8/4/21).
8/4/21).
52 SGX, “SGX and Temasek JV Ties Up With Covalent to Build End-to-End Digital Infrastructure”,
65 Asset Securitization Report, “Wilmington Trust Has High Hopes for Blockchain Boost in RMBS
29 January 2021, https://links.sgx.com/FileOpen/20210129_SGX%20and%20Temasek%20
Market”, 13 July 2020: https://asreport.americanbanker.com/news/wilmington-trust-has-high-
JV%20ties%20up%20with%20Covalent%20to%20build%20end-to-end%20digital%20infra-
hopes-for-blockchain-boost-in-rmbs-market (link as 8/4/21).
structure.ashx?App=Announcement&FileID=646708 (link as of 13/4/21).
66 BIS, “Derivatives Statistics”, March 2021: https://www.bis.org/statistics/about_derivatives_
53 The World Bank, “World Bank Issues Second Tranche of Blockchain Bond Via Bond-I”, 16
stats.htm?m=6%7C32%7C639 (link as of 8/4/21).
August 2019: https://www.worldbank.org/en/news/press-release/2019/08/16/world-bank-is-
sues-second-tranche-of-blockchain-bond-via-bond-i (link as of 8/4/21). 67 ISDA, “Key Trends in the Size and Composition of OTC Derivatives Markets in the Second Half
of 2019”, June 2020: https://www.isda.org/a/BAQTE/Key-Trends-in-Size-and-Composition-
54 Reuters, “JPMorgan, National Bank of Canada, others test debt issuance on blockchain”,
of-OTC-Derivatives-Markets-in-2H-2019.pdf (link as of 8/4/21).
20 April 2018: https://www.reuters.com/article/us-jpmorgan-blockchain/jpmorgan-nation-
al-bank-of-canada-others-test-debt-issuance-on-blockchain-idUSKBN1HR0CM (link as of 68 BIS, “Exchange-Traded Futures and Options, by Currency”, March 2020: https://stats.bis.org/
8/4/21). statx/srs/table/d2 (link as of 8/4/21).
55 Ledger Insights, “Russia’s NSD places bond via blockchain”, 2018: https://www.ledgerin- 69 ISDA, “What Is the ISDA CDM?”, June 2018: https://www.isda.org/a/z8AEE/ISDA-CDM-Fact-
sights.com/russias-nsd-bond-blockchain/ (link as of 8/4/21). sheet.pdf (link as of 8/4/21).
56 Santander, “Santander Launches the First End-to-End Blockchain Bond”, 12 September 70 Markets Media, “Derivatives Post-Trade Poised For Digital Transformation”, 28 January 2021:
2019: https://www.santander.com/en/press-room/press-releases/santander-launches-the- https://www.marketsmedia.com/derivatives-post-trade-poised-for-digital-transformation/ (link
first-end-to-end-blockchain-bond (link as of 8/4/21). as of 8/4/21).
57 Ledger Insights, “Société Générale Issues Bond on Public Ethereum Blockchain”, 2019: https:// 71 Forbes, "Citi, Goldman Sachs Conduct First Blockchain Equity Swap on Ethereum-Inspired
www.ledgerinsights.com/societe-generale-blockchain-bond-ethereum/ (link as of 8/4/21). Platform”, 6 February 2020: https://www.forbes.com/sites/michaeldelcastillo/2020/02/06/
citi-goldman-sachs-conduct-first-blockchain-equity-swap-on-ethereum-inspired-plat-
form/?sh=1dbe31323694 (link as of 8/4/21).

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 98
ENDNOTES

72 Walker, Angie, “Digital Assets + Distributed Ledgers: Use Cases in Institutional Finance”, 86 Ledger Insights, “Tokyo Stock Exchange Owner JPX Progresses Blockchain Post Trade Pi-
presentation at DADL.fin conference, 16 February 2021. lots”, June 2020: https://www.ledgerinsights.com/tokyo-stock-exchange-jpx-blockchain-post-
trade-pilots/ (link as of 8/4/21).
73 DTCC, "DTCC Enters Test Phase on Distributed Ledger Project for Credit Derivatives with
MarkitSERV & 15 Leading Global Banks", 6 November 2018: https://www.dtcc.com/ 87 Markets Media, “OCC to Replace Securities Lending Infrastructure with DLT”, 6 May 2020:
news/2018/november/06/dtcc-enters-test-phase-on-distributed-ledger-project-for-credit-de- https://www.marketsmedia.com/occ-to-replace-securities-lending-infrastructure-with-dlt/ (link
rivatives-with-markitserv (link as of 8/4/21). as of 8/4/21).
74 Baton Systems, “Baton Teams Up with Citi to Upgrade Treasury Function for Cleared Deriva- 88 Boston Consulting Group, “Global Asset Management 2020 Protect, Adapt, and Innovate”,
tives”, 8 October 2020: https://www.batonsystems.com/2020/10/08/baton-teams-up-with- May 2020: https://image-src.bcg.com/Images/BCG-Global-Asset-Management-2020-May-
citi-to-upgrade-treasury-function-for-cleared-derivatives/ (link as of 8/4/21). 2020-r_tcm9-247209.pdf (link as of 8/4/21).
75 Ledger Insights, “Colombian Stock Market Plans Blockchain for OTC Derivatives Margins”, 89 FundsDLT, “Helping the Fund Industry Boost Value”: https://www.fundsdlt.net/about/ (link as
25 November 2020: https://www.ledgerinsights.com/colombian-stock-market-block- of 8/4/21).
chain-otc-derivatives-margins/ (link as of 8/4/21).
90 allfunds, "Allfunds Blockchain and ConsenSys Partner to Advance Blockchain Technology for
76 EIN Press Wire, "Eastspring Investments, BNP Paribas Securities Services, STACS Co-Devel- the Fund Industry", February 2021: https://allfunds.com/en/blog/2021/02/11/allfunds-block-
op Blockchain Solution for Trading Efficiencies", 5 February 2021: https://www.einpresswire. chain-and-consensys-partner-to-advance-blockchain-technology-for-the-fund-industry/ (link
com/article/535235625/eastspring-investments-bnp-paribas-securities-services-stacs-co-de- as of 8/4/21).
velop-blockchain-solution-for-trading-efficiencies (link as of 8/4/21).
91 Calastone, “The Carlyle Group to Acquire Calastone”, October 2020: https://www.carlyle.com/
77 SIFMA, “US Repo Fact Sheet”, January 2021: https://www.sifma.org/wp-content/up- media-room/news-release-archive/carlyle-group-acquire-calastone (link as of 8/4/21).
loads/2020/04/2021-US-Repo-Fact-Sheet.pdf (link as of 8/4/21).
92 IZNES, “The IZNES Platform”: https://iznes.io/en/la-plateforme-iznes/ (link as of 8/4/21).
78 New York Fed, “Tri-Party/GCF Repo”, March 2021: https://www.newyorkfed.org/data-and-sta-
93 Businesswire, “Figure Launches First Digital Fund Services Offering on Blockchain”, Septem-
tistics/data-visualization/tri-party-repo#interactive/volume/collateral_value (link as of 8/4/21).
ber 2020: https://www.businesswire.com/news/home/20200917006020/en/Figure-Launch-
79 Bloomberg, “Why Firms Should Start Trading Repo Electronically Now”, 29 January 2020: es-First-Digital-Fund-Services-Offering-on-Blockchain (link as of 8/4/21).
https://www.bloomberg.com/professional/blog/why-firms-should-start-trading-repo-electroni-
94 FundAdminChain, “FAC: Digital Funds Network”: https://fundadminchain.com/ (link as of 8/4/21).
cally-now/ (link as of 8/4/21).
95 JPMorgan, “J.P. Morgan Creates Digital Coin for Payments”, 1 February 2021: https://www.
80 ISLA, “International Securities Lending Association”, March 2021: https://www.islaemea.org/
jpmorgan.com/solutions/cib/news/digital-coin-payments (link as of 8/4/21).
(link as of 8/4/21).
96 Consortium Includes Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, Credit
81 New York Fed, “Reference Guide to US Repo and Securities Lending Markets”, December
Suisse, ING, KBC Group, Lloyds, Mizuho, MUFG, Nasdaq, Sumitomo Mitsui, State Street, and
2015: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf (link
UBS. See https://www.fnality.org (link as of 8/4/21).
as of 8/4/21).
97 PYMNTS.com, “SWIFT to Open gpi to Blockchain Rails", 24 June 2019: https://www.pymnts.
82 Broadridge, “Broadridge Distributed Ledger Repo”: https://www.broadridge.com/financial-ser-
com/news/b2b-payments/2019/swift-to-open-gpi-to-blockchain-rails/ (link as of 8/4/21).
vices/capital-markets/transform-trade-life-cycle/dlt-repo (link as of 8/4/21).
98 Ledger Insights, “Bank of England Announces New Innovation-Oriented Payments Network”,
83 JPMorgan, “J.P. Morgan Executes Intraday Repo Transaction Using Blockchain”, 10 Decem-
August 2020: https://www.ledgerinsights.com/bank-of-england-innovation-oriented-pay-
ber 2020: https://www.jpmorgan.com/news/jpmorgan-executes-intraday-repo-transaction-us-
ments-network-digital-pound/ (link as of 8/4/21).
ing-blockchain (link as of 8/4/21).
99 Bank for International Settlements, “Project Helvetia: Settling Tokenised Assets in Central Bank
84 “HQLAx, Overview”: https://www.hqla-x.com/ (link as of 13/4/21).
Money”, December 2020: https://www.bis.org/publ/othp35.pdf (link as of 8/4/21).
85 Ledger Insights, “Tel Aviv Stock Exchange to Launch Blockchain Securities Lending in Novem-
100 Ian Allison, “BNY Mellon Announces Crypto Custody and Spies Integrated Services,” Coin-
ber”, July 2020: https://www.ledgerinsights.com/tel-aviv-stock-exchange-blockchain-securi-
desk, 11 February 2021: https://www.coindesk.com/bny-mellon-announces-crypto-custo-
ties-lending/ (link as of 8/4/21).
dy-and-spies-integrated-services (link as of 13/4/21).
101 Pyctor, “Pyctor: About”: https://www.pyctor.com/#about (link as of 13/4/21).

Digital Assets, Distributed Ledger Technology and the Future of Capital Markets 99
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