The finance and fintech news of late 2022 and early 2023 may have created uncertainty for some financial institutions and digital assets skeptics.
Nonetheless, it facilitated the historical transition from blind confidence to educated optimism surrounding cutting-edge financial technologies, particularly DLT (distributed-ledger technology).
Those closely monitoring the financial landscape today witness rising opportunities for institutional investors boosting blockchain adoption.
In fact, 93% of institutional investors believe in the long-term value of blockchain technology for finance, and 74% intend to increase their allocations to the digital asset sector in the year ahead.
As the evolution of digital asset infrastructure unfolds, we see increased interest from institutional investors.
However, certain challenges prevail among traditional finance institutions that want to implement blockchain solutions.
The question remains how can this interest be translated into tangible action?
Let’s address the main obstacles hindering the true universal mass adoption of DLT in financial services.
What DLT brings to the table
DLT is a backbone of blockchain that enables the recording, sharing and synchronization of data across multiple locations without the need for a central authority.
DLT is a catalyst for innovation. It democratizes access to capital and helps issuers and other market participants unlock new opportunities from securities issuance to settlement, trading and servicing.
Leveraging DLT in securities markets can create savings worth more than $100 billion annually, freeing up collateral outstanding in segments like derivatives and securities lending.
Implementing smart contracts to automate settlement and corporate action processes for stock splits and mergers can lower operational costs by $15-20 billion.
Operating on a large scale, DLT has the potential to unlock new liquidity pools, such as the projected $16 trillion global market for tokenized illiquid assets by 2030.
In this way, blockchain represents the long-awaited technological leap in the post-trade landscape, encompassing custody, asset transfer and settlement.
This innovation offers the potential to establish a global, asset-agnostic trading and settlement platform, operating 24/7 and accessible worldwide.
Hereafter, we move away from the limitations of asset-specific, single-purpose and centralized settlement infrastructures, fostering a more interconnected and efficient ecosystem.
As the technology evolves, it paves the way for a truly global market, eliminating country-specific barriers.
Moreover, DLT establishes liquidity corridors that unite issuers and investors across borders, fostering unprecedented opportunities for growth and collaboration.
So, what are the obstacles for this groundbreaking technology to mature to a complete institutional use level?
Challenges ahead and ways to address them
The primary challenge lies in adapting appropriate universal laws traditional financial institutions can rely upon.
Currently, the legal framework is highly domestic and tailored to specific assets, which hinders the global adoption.
To concretize this vision of a global ecosystem where assets can be seamlessly exchanged and transacted, market players and decision-makers must embrace asset-agnostic regulations.
Such forward-looking regulations will empower the future where finance transcends boundaries and reaches new heights of efficiency and accessibility.
Another interconnected obstacle is the absence of international standards and solutions for the adoption of a Universal ID and credential scheme, which is essential for harnessing the complete potential of decentralized banking.
To address this, tech-savvy banks can collaborate with regulatory bodies to establish a unified framework for universal IDs, ensuring seamless integration and enhanced security for individuals and businesses.
Perhaps the most challenging initiated-from-within barrier for banks will lie in change management. Here, we not only refer to the capacity of financial institutions to adapt their operations and technology stack.
The change implies transforming a whole business model in the face of a major paradigm shift. It means navigating instant settlement, liquidity provision and operating across borders and potentially 24/7.
An imminent hard pill to swallow will be embracing the departure of current revenue streams.
Those revenue channels historically originated from market inefficiencies that will be inevitably solved by blockchain solutions.
Paving a path to success
The recent developments in fintech and finance have brought about a shift in perception toward digital assets and DLT.
Institutional investors are increasingly recognizing the long-term value of blockchain technology.
And with the right approach, the industry opens up to new challenges and growth opportunities presented by a future of interconnected and efficient financial ecosystems.
As you can see, the primary challenges for the institutional adoption of digital assets do not revolve around the nature of blockchain technology per se.
On the contrary, the innovative future of banks and FMIs hinges on their ability to embrace change and avoid becoming complacent, akin to the unfortunate fate of Kodak, by remaining agile and visionary.
By addressing the issues of global standardization and change management, we can steer toward a future powered by blockchain that will inevitably reshape the landscape of finance within the next five to 10 years.
Alexandre Kech is the head of digital securities at SIX Digital Exchange (SDX) and a prominent figure in the world of banking and digital assets, with over 20 years of experience in the field. Alexandre has worked for several leading companies in the financial industry, including BNY Mellon, SWIFT and Citi Ventures.
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