GFMA releases report on risks and benefits of DLT in capital markets
17 May 2023 US
Image: C.Castilla/stock.adobe.com
The Global Financial Markets Association (GFMA) has published a report on the potential benefits and risks of distributed ledger technology (DLT) and DLT-based securities in capital markets.
The report was developed in partnership with organisations including Boston Consulting Group, Clifford Chance, Cravath, Swaine & Moore and AFME.
‘The Impact of Distributed Ledger Technology in Global Capital Markets’, considers collateral management, the tokenisation of assets and sovereign and quasi-sovereign bonds as emerging use cases where the technology could be beneficial.
Existing legal, regulatory and risk management frameworks were also assessed, with their applicability to DLT technology considered.
According to the report, DLT could allow for improved cost operational efficiency, greater market access and new liquidity pools. There is also potential for more innovation-led growth, it stated.
However, focusing on the securities markets, most DLT-based issuances have been on an experimental scale due to challenges identified over the course of the process.
The GFMA has developed a digital assets classification approach which categorises them based on risk, allowing for tailored regulatory processes. This will also improve legal clarity and build confidence among asset managers, investors and issuers.
Five calls to action are included in the paper. Establishing a harmonised global regulatory and legal framework, enabling interoperability by agreeing on common standards and collaborating on technical solutions are identified as ways that market participants and regulators can reduce barriers to adoption and accelerate the development of DLT-based capital markets.
Continuing to develop DLT-based payment solutions and prioritising resources in asset classes that would benefit most from DLT technology are also highlighted as steps that the industry should take.
Commenting on the report, Adam Farkas, chief executive of the GFMA, says: “DLT holds promise for driving growth and innovation. This potential should not be ignored or prohibited where regulatory oversight and resiliency measures already exist. Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets, while also setting out a level playing field for both new entrants and regulated financial institutions.
“A technology-neutral and outcomes-based approach to regulation is crucial. The goal of our latest report is to help policy makers and financial market participants to find a way forward that ensures appropriate stability and protections, while also allowing the industry and economy to harness the benefits of this new technology.”
Léandre Moreno, digital assets product manager at Murex, states: “Having regulatory clarity and legal certainty is a must for institutions. Now, we need global industry led standardisation initiatives to scale and use all the potential of DLTs to very efficiently meet cybersecurity requirements and ease regulatory compliance. As such, a digital standard should now be a prerequisite to increase transparency, efficiency and remove settlement risk.”
Simon Gleeson, consultant at Clifford Chance, adds: “The introduction of DLT across finance poses a whole new series of challenges for legal and regulatory frameworks. Legal structures must deliver clarity of ownership rights, settlement finality and robust insolvency treatment.
“Regulatory structures must deliver high levels of investor protection without impeding the development of new products and services. However, those apparently simple objectives require deep and sophisticated thought and analysis. This report is a significant step towards these goals.”
The report was developed in partnership with organisations including Boston Consulting Group, Clifford Chance, Cravath, Swaine & Moore and AFME.
‘The Impact of Distributed Ledger Technology in Global Capital Markets’, considers collateral management, the tokenisation of assets and sovereign and quasi-sovereign bonds as emerging use cases where the technology could be beneficial.
Existing legal, regulatory and risk management frameworks were also assessed, with their applicability to DLT technology considered.
According to the report, DLT could allow for improved cost operational efficiency, greater market access and new liquidity pools. There is also potential for more innovation-led growth, it stated.
However, focusing on the securities markets, most DLT-based issuances have been on an experimental scale due to challenges identified over the course of the process.
The GFMA has developed a digital assets classification approach which categorises them based on risk, allowing for tailored regulatory processes. This will also improve legal clarity and build confidence among asset managers, investors and issuers.
Five calls to action are included in the paper. Establishing a harmonised global regulatory and legal framework, enabling interoperability by agreeing on common standards and collaborating on technical solutions are identified as ways that market participants and regulators can reduce barriers to adoption and accelerate the development of DLT-based capital markets.
Continuing to develop DLT-based payment solutions and prioritising resources in asset classes that would benefit most from DLT technology are also highlighted as steps that the industry should take.
Commenting on the report, Adam Farkas, chief executive of the GFMA, says: “DLT holds promise for driving growth and innovation. This potential should not be ignored or prohibited where regulatory oversight and resiliency measures already exist. Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets, while also setting out a level playing field for both new entrants and regulated financial institutions.
“A technology-neutral and outcomes-based approach to regulation is crucial. The goal of our latest report is to help policy makers and financial market participants to find a way forward that ensures appropriate stability and protections, while also allowing the industry and economy to harness the benefits of this new technology.”
Léandre Moreno, digital assets product manager at Murex, states: “Having regulatory clarity and legal certainty is a must for institutions. Now, we need global industry led standardisation initiatives to scale and use all the potential of DLTs to very efficiently meet cybersecurity requirements and ease regulatory compliance. As such, a digital standard should now be a prerequisite to increase transparency, efficiency and remove settlement risk.”
Simon Gleeson, consultant at Clifford Chance, adds: “The introduction of DLT across finance poses a whole new series of challenges for legal and regulatory frameworks. Legal structures must deliver clarity of ownership rights, settlement finality and robust insolvency treatment.
“Regulatory structures must deliver high levels of investor protection without impeding the development of new products and services. However, those apparently simple objectives require deep and sophisticated thought and analysis. This report is a significant step towards these goals.”
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