Gerd Hartung, head of digital markets at Deutsche Boerse, explained that using blockchain for trading and settlement of securities such as stocks and bonds would require a uniform digital format of securities. “The question is how are we going to reach digital formats like MP3, which you see in the music industry. The next level will be digitization of financial instruments,” he said. The audio quality of the digital MP3 file format was initially poor and improved with the introduction of MP3 music players and streaming systems. This eliminated the need for many middlemen in the music industry and gave artists more opportunities.
Similar developments in financial markets would allow an instrument to be issued in a matter of hours instead of several days. This will help in focusing on specific markets and reach out to more investors faster. This will also get rid of data errors. However, this will challenge the dominant position of banks in the system.
Experts say there is a need to clarify the regulatory definition of digital assets. Old technology is being used by banks which is difficult to integrate with DLT. However, there is a cost involved with blockchain. This cost will also need to be reduced before major changes can be made to the financial system. Some global financial institutions have taken a step towards this and they are settling foreign currency trades using blockchain. Regulators will also need time to adjust to the new technology. The European Union and the UK have started testing DLT in market infrastructure. It is anticipated that using blockchain for tasks such as settlement can result in significant cost savings.
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