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.
What is decentralized finance?
The concept of decentralized finance is closely related to Distribted Ledger Technology and Digital Assets. It refers to a rapidly growing ecosystem of financial applications, most of which operate on a peer-2-peer (no intermediary) basis. Taken to its extreme, decentralized finance could completely disintermediate the traditional finance system and cover the full range of banking use cases. Traditional financial institutions are already testing highly automated trading of financial instruments using permissioned Decentralized Finance (DeFi) liquidity pools on public blockchains.
At present, it is not foreseeable how this area will be regulated in the future. Decentralized finance protocols and Decentralized Autonomous Organizations (DAO) may partially escape the control of established authorities.
Which financial services institutions are affected?
The impact of DLT affects many players in the financial services value chain. Manifold use cases include custody, asset transfer, brokerage, investment services, asset servicing, payments and many more. It is imperative to start a strategic dialog about the impact of DLT on a company’s value chain – depending on each player’s strategic positioning.
en
