The London Stock Exchange Group (LSE Group) is preparing to launch a new digital markets business that will use blockchain technology to offer extensive trading of traditional financial assets, according to a report by the Financial Times.
What is blockchain and why is it important?
Blockchain is a digital ledger that records and verifies transactions in a decentralized and secure way. It is the technology that underpins cryptocurrencies such as bitcoin, but it can also be used to improve the efficiency and transparency of other types of transactions, such as issuing and trading securities, bonds, derivatives, and commodities.
Blockchain can reduce the need for intermediaries, such as brokers, clearing houses, and custodians, and lower the costs and risks associated with trading. It can also enable faster settlement times, real-time reporting, and enhanced liquidity.
How will LSE Group use blockchain?
LSE Group is not building anything around cryptoassets, but it is looking to use the technology that underpins them to create a new digital markets business that will offer a range of services for traditional financial assets. These include:
- Primary issuance: enabling companies and governments to raise capital by issuing digital tokens that represent equity, debt, or other assets.
- Secondary trading: providing a platform for investors to buy and sell digital tokens in a regulated and transparent environment.
- Post-trade services: offering custody, settlement, and reporting solutions for digital tokens.
LSE Group is considering using a separate legal entity for the digital markets business, which it hopes to have running within the next year, subject to regulatory approvals. The company is already in talks with regulators in multiple jurisdictions, as well as the government and Treasury in the UK.
What are the benefits and challenges of blockchain-based digital markets?
LSE Group believes that blockchain-based digital markets can offer significant benefits for both issuers and investors, such as:
- Greater access: enabling more companies and projects to raise capital from a wider pool of investors, especially in emerging markets.
- More innovation: allowing for more flexibility and creativity in designing and structuring digital tokens that suit different needs and preferences.
- Better performance: improving the speed, security, and reliability of trading and settlement processes.
However, there are also some challenges and risks associated with blockchain-based digital markets, such as:
- Regulatory uncertainty: requiring clear and consistent rules and standards across different jurisdictions and authorities to ensure compliance and consumer protection.
- Technical complexity: involving high levels of technical expertise and coordination among various stakeholders to ensure interoperability and scalability of blockchain systems.
- Market volatility: exposing investors to potential price fluctuations and liquidity issues due to the nascent and dynamic nature of the blockchain industry.
How does LSE Group compare with other players in the blockchain space?
LSE Group is not the first or the only player in the financial industry to explore the potential of blockchain technology. Several other exchanges, banks, and fintech firms have been developing or testing blockchain-based solutions for various aspects of capital markets.
- Nasdaq has launched a platform called Linq that allows private companies to issue and trade digital securities using blockchain.
- HSBC has partnered with Digital Asset Holdings to create a platform called Daml that enables faster and cheaper issuance and settlement of syndicated loans using blockchain.
- Fidelity Investments has launched a platform called Fidelity Digital Assets that offers custody and execution services for institutional investors who want to invest in cryptoassets.
However, LSE Group claims that its digital markets business will be unique in offering a comprehensive suite of services for traditional financial assets on the blockchain. It also says that it has an advantage over other players due to its global reach, reputation, and experience in capital markets.
