According to research conducted by the Global Financial Markets Association (GFMA), incorporating distributed ledger technology (DLT) in traditional financial markets has the potential to deliver annual savings of up to $100 billion.
Released on May 16, 2023, the research report was a collaborative effort between the GFMA, the Boston Consulting Group (BCG), and advocates of the traditional banking industry. The organizations urge financial institutions and regulators to carefully consider the advantages offered by DLT.
GFMA CEO Adam Farkas highlighted the significant potential of DLT and emphasized that existing regulatory monitoring and resilience mechanisms should not hinder or dismiss its benefits.
Distributed ledger technology (DLT) is a decentralized technology that records digital information and transactions. Blockchain networks are familiar examples.
The research paper suggested that implementing DLT could yield approximately $100 billion in additional savings by streamlining collateral procedures in derivatives and lending markets. Clearing and settlement systems and custody and asset services are specific areas highlighted in the report. The utilization of smart contracts to enhance clearing and settlement processes has the potential to reduce annual overhead costs by $20 billion.
While the impact of DLT on primary markets and secondary trading is expected to be less significant, the report indicated that tokenization in these markets could lead to improved risk mitigation and increased liquidity.
Meanwhile, the international adoption of DLT is gaining momentum. Euroclear, a prominent European securities clearing company, announced its intention to integrate DLT into its settlement process in March 2023. With custody of assets exceeding $40.9 trillion, Euroclear’s move signals the industry’s recognition of DLT’s potential.
In another notable development, the Bank of England and the Innovation Hub London Center of the Bank for International Settlements (BIS) released a report on April 19, 2023, discussing the success of the collaborative pilot project, Project Meridian. The project tested a DLT-based system for the Bank of England’s real-time gross settlement (RTGS) system, specifically focusing on inter-institutional settlements. The report revealed that the RTGS system and the synchronization network utilized distributed ledger technology (DLT) and communicated effectively through API-enabled connections, thus paving the way for easy integration of other asset classes, such as foreign currency.
The GFMA’s analysis aligns with Citi’s projection that the blockchain-based market for tokenized assets could reach a staggering $5 trillion by 2030. Both reports highlight the increasing interest and potential of DLT within the financial sector.
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