DLT is not a solution to every problem, SFT Technology Symposium panellists warn
Distributed ledger technology (DLT) is not a solution to every problem, and banks need to find valid use cases that work for them, panellists at this year’s Securities Finance Technology Symposium said.
The statements were made during the Digital Assets in Securities Finance panel, which examined the current state of digital assets in the market and considered possible future prospects for the industry.
Ted Allen, director of business development, securities finance and collateral at FIS, was quick to remind the audience that the term “digital assets” does not just refer to cryptocurrencies – in fact, these do not fall within the purview of the securities finance industry. Instead, banks are looking to tokenize existing assets and bonds, improve the efficiency of their current business, and eventually issue digitally native assets.
That process will not be quick, Allen warned, calling the transition an “evolution” and a “gradual migration” from traditional to new rails, with both forms coexisting for many years before a digital approach is fully adopted.
The coexistence of old and new can pose a challenge for many market participants. Richard Glen, Solution Architect at HQLAX, highlighted how HQLAX set up an initial “one-way” version of its agency securities lending solution to help agent lenders integrate their lending activities into a digital ledger without impacting their borrowers’ collateral management. This step-by-step approach allows for a more steady workflow integration and allows the market to gain confidence in new ways of working before realizing the full benefits of a delivery-versus-delivery mechanism, he said.
Another concern regarding digital assets could be ownership issues, suggested another panelist. When something goes wrong, it is often unclear where the rights lie. Since each digital asset has a different answer to this, market participants want to be clear about where they stand.
David Shone, director of market infrastructure and technology at the International Securities Lending Association, stated that market demand is high and the association’s digital steering group asked how the industry should begin to introduce digital assets into its day-to-day operations. He stressed the need for standardization, legal frameworks and regulation, and education. Market participants need only view digital assets as just another asset class, he said, with the misconception that the technology is the product and not the asset itself, making many cautious about getting involved.
Trust comes from a working product or system, Allen said. Regulation may not necessarily be the only solution to the lack of trust in digital assets – people simply need to see that they represent a viable and effective opportunity. Glen added that greater ecosystem engagement with this issue will help prove that digital assets and the systems around them work and earn the trust of the industry.
He also emphasized the importance of an easy transition for customers who want to be able to use their current infrastructure to see and process digital assets alongside their traditional counterparts. The importance of having an infrastructure capable of supporting all market blockchains was also cited as a priority.
Regarding central bank digital currencies (CBDCs), the panel raised the issue of lack of consistency across jurisdictions, particularly with regard to tax laws, which could pose a barrier to adoption.