Distributed Ledger Technology
More than almost any other technology to date, Distributed Ledger Technology (DLT) has the power to disrupt the traditional financial services system
What is DLT?
Distributed ledger technology allows data and transactions to be stored real-time and tamper-proof in a cryptographically secured, decentralized ledger. The state of this ledger is verified and updated by a network of participants, the so called “nodes”. When a network participant proposes a new transaction, the remaining network nodes verify the proposed change to the ledger, i.e., they use a computer algorithm to reach a consensus on the new state of the ledger. Importantly, the use of such a consensus algorithm allows DLT networks to exchange data and capital without the need for centralized intermediaries.
Why is DLT relevant to the financial industry?
Distributed ledger technology can impact the workflows of almost every department within a financial institution. It offers various technological advantages such as processes without intermediaries (e.g. post-trading settlement) or decentralized and tamper-proof storage of data (e.g. KYC profiles).
On the one hand, DLT can be used for process optimization purposes as it enables instant, cost-effective transaction processing and algorithm-based execution of smart contract orders. This offers great potential, particularly for the exchange of data and capital between companies.
On the other hand, distributed ledger technology has laid the foundation for a new asset class called Digital Assets, which consists primarily of payment, security, utility and non-fungible tokens (NFTs). Digital Assets allow individuals and legal entities to own assets in virtual space. The first use cases of Digital Assets primarily revolved around cryptocurrencies, such as Bitcoin or Ether. More recently, however, there has been interest in other forms of Digital Assets, such as tokenized securities (registered securities in Switzerland, crypto-securities in Germany) or NFTs.