24 Feb

SDS WHITEPAPER: DLT in Securities Settlement: Status and Outlook. Opportunity or Threat?

Distributed ledger technology is over ten years old by now and has been one of the most extensively discussed topics for quite some time, not only in the IT industry but also in the specialist departments of financial institutions. Perceived both as a chance and as a threat, the topic attracts a lot of attention as well as a good amount of risk capital, and it is starting to establish itself for one or the other use case in the regulated environment as well.

After more than a decade, DLT is gradually arriving in the financial industry. This time period does not come as a surprise: Other significant technological innovations such as computerised bookkeeping, decentralised systems (LINUX), cloud or digital KYC procedures have also taken some time until they were sophisticated enough to be used on a large scale in the financial industry.

There are two aspects of distributed ledger technology (DLT) that make its acceptance and distribution in the financial industry difficult: Firstly, DLT-based solutions tend to (at least partially) lever out the current market infrastructure and organisation, which leads to uncertainty in organisations or even to resistance of individual market participants. Secondly, the technology is difficult to understand and partially requires sound mathematical thinking skills. To the best of the author’s knowledge, there is no simple yet convincing explanation for the functioning of a blockchain, so there still remains a certain distrust of the technology among many people. Simultaneously, the lack of comprehension of DLT’s features repeatedly results in inadequate suggestions regarding its usage. The first decade in the life of DLT has not been free of problems either. There have been software errors, financial losses, conflicts within the community and legal problems. All of these issues show that DLT is not spared from the natural maturing process of a new technology either.

The new SDS white paper reflects the most discussed topics in the specialist area of financial institutions and in financial IT.