DLT and digital assets in 2023: The headlines
In May 2022 (the time of our last survey), digital assets were not only dominating the agenda but their usage was growing at record pace. With 400% year-on-year growth in the number of live projects, DLT and digital assets were becoming a core investment priority for firms across the industry – focused on a new generation of asset classes that were showing early signs of commercial maturity.
One year on, how different do things look today? After the “crypto-winter” of 2022, challenges in major FMI-led transitions and a new focus on cost-efficiency across the industry, what role do DLT and digital assets play today – and how can we characterise the evolution of our usage today?
1. DLT and digital assets are 12% more important to the industry than last year
The importance of DLT to almost every part of today’s capital markets has risen in the last 12 months.
During every year since our research began in 2020, sell-side houses have continued to see DLT as increasingly core to their strategies – and this journey continues in 2023. Despite numerous challenges, financial market infrastructures (FMIs), investment banks and custodians all see DLT and digital assets as around 10% more important to their businesses than a year ago, driven by continuing momentum in interbank activities (such as collateral management, securities lending, securitisation and structured product issuance). With increasing commercial usage and ecosystem adoption, the journey of DLT and digital assets towards the core of tomorrow’s sell-side operating models continues – albeit at a slower pace than in previous years (see below).
Fund managers and wealth managers are also increasingly convinced of the long-term benefits of DLT in 2023 – with a 45% increase in interest amongst investment managers this year. Having been indifferent to the benefits of digitisation for several years, fund managers’ digitisation of subscriptions, redemptions and (increasingly) the whole fund is driving a fresh wave of enthusiasm and momentum amongst product manufacturers.
Yet momentum is not growing everywhere. Insurers, pension funds and sovereigns see DLT as 52% less relevant this year than last – in a sign of major disengagement at the end of the investment cycle.
Are asset owners calling time on the hype (having seen relatively little benefits to their businesses in the last few years)? Or are they simply underlining their indifference to the infrastructure narrative overall? If service providers (including their fund managers and custodians) choose to tokenise securities to make their processing more efficient then good for them – but this work will be meaningless until it hits the asset owner’s portfolio performance.
For the infrastructure managers and providers of today’s capital markets, there is clearly a growing acceptance that this technology is a core part of the future operating model. How and when that touches the investor’s portfolio is still unclear.
2. Usage of DLT and digital assets has grown by 7% – but growth is slowing
As last year’s buildouts and planning have come to fruition, we have seen a 7% increase in the number of firms who are “live” with DLT and digital assets over the last 12 months – compared with 24% jump from 2021 to 2022. We are using DLT more than ever – but this year appears to have been more about finishing existing builds than about starting new ones. We have seen a 4% reduction in pilots in 2023 and a 7% reduction in the number of firms building commercial DLT projects (albeit based on a larger sample size than 2022).
This is not a new development – as the industry passed its peak of first-wave pilots and development activity in 2021. Since passing a peak in the hype-cycle, we have seen DLT developments focus and sharpen – driven by a number of factors:
- In the short term, increasing competition for resources (due to regulatory deadlines on CSDR, T+1 and other transitions) have made experimentation efforts on DLT harder to resource – meaning that only the most robust DLT business cases are being signed off.
- Equally, many banks and brokers are realising that they are not in a position to make their DLT initiatives pay (at least, not as isolated projects). Having concluded their experimentation and established what is possible internally, firms are now waiting for major ecosystem managers (such as FMIs or platforms) to take the lead in creating liquid, interoperable digital ecosystems that can really deliver these benefits at an industry-wide scale, in primary and secondary markets.
- Finally, DLT applications are increasingly “off-the-shelf” and need less discovery as they mature. With leading market applications beginning to mature (in collateral, structured products and crypto-currencies, for example) there is less need for every firm to experiment – as they can simply buy into an established and proven operating model. Builds and pilots are turning into implementations.
These are signs of maturity – not lost momentum. With DLT usage continuing to grow in 2023, the industry is clearly still focused on expanding its use of DLT and digital assets – but development is being led by a smaller number of better-informed firms, backed by better business cases than ever.
“DLT is increasingly becoming an off-the-shelf offering. Banks no longer need to experiment to discover what is possible – they can source solutions that they know will work and deliver value on day one.”
3. DLT in 2023 is about enabling cost efficiencies – not new revenues
In a context of industry-wide ‘cost reductions and reduced investment budgets in 2023, it is not surprising that today’s DLT is primarily about delivering cost efficiencies (with a 16% year-on-year growth in the number of firms running DLT projects to derive operational savings).
With growing evidence of the savings that can be achieved from digital bond issuance, collateral tokenisation or private asset trading (for example), our ability to make the business case for DLT based on operational savings is growing significantly. We are no doubt still learning, but with growing numbers of firms going on-record as having saved 60% of their operating costs, for example, we know more clearly than ever where and how DLT can help us to reduce operational costs - and so it is no surprise that we are increasingly putting that at the forefront of our investment commitments.
4. 75% of our projects are now delivering as expected – and not just in reducing costs
…and we’re delivering against those commitments.
We have seen a 26% increase in the number of DLT and digital asset initiatives that have delivered against expectations in the last year. With three quarters of our initiatives now delivering against expectations, we are clearly maturing in our ability not only to forecast benefits but also to realise them.
In the case of driving cost savings, over 90% of projects in 2023 have met or exceeded expectations – validating our growing confidence in this core area. Yet DLT’s value in supporting regulatory compliance and in facilitating legacy platform replacement should not be overlooked (with 100% and 89% of projects meeting or exceeding expectations in 2023, respectively). We are evidently getting much better at planning and executing on our DLT and digital asset projects - but more work is needed to ensure that the wider benefits of DLT are understood.
"DLT is continuing along on its innovation journey. As capital markets firms adapt the technology to reinvent their business over time, we will see an evolution of business opportunities enabled by tokenization, such as new forms of capital raising." (John Lee, Accenture)
5. DLT is ready to scale – in 5 key asset classes
In the context of reliability and delivery, five asset classes (or activities) stand out today as leading the field in their maturity. In the last year, DLT deployments in OTC derivatives, structured products, securities financing, securitised assets and private equity have consistently been used the most for commercial purposes and they have delivered most consistently against expectations.
Whilst we may struggle to understand the potential benefits of DLT for certain asset classes, there is little doubt that our understanding and maturity in the deployment of these five is at the forefront of the industry. These ones are ready to scale.
6. DLT is too fractionalised – making business cases harder
Yet we have a problem. The challenge of creating a liquid interoperable ecosystem for digital assets is the single biggest obstacle that undermines our case for DLT adoption – and is a blocking issue for 24% of us today. With 74% of DLT ecosystems involving fewer than six participants, there is a growing risk that our DLT innovation to date has left us with a core problem: how to join it all up?
Ecosystems are maturing in custody, issuance, collateral, securities finance and other key areas of the lifecycle. Yet so far each of these is isolated and participants are unable to port their digital assets between different parts of the digital trade lifecycle. That means that bonds and structured products may deliver issuance efficiencies when tokenised but, if they can not be transferred, mobilised and financed to the same degree as their traditional counterparts, they remain functionally inferior (and more expensive to maintain). The business case for DLT vanishes.
For those who have taken their DLT platforms live, the limited cross-platform liquidity of tokens is the single biggest issue that they face. Yet only 4% of firms are currently working on integration across multiple blockchain protocols.
Getting the DLT business case right is the central enabler of growth for this technology today – and our ability to create seamless digital liquidity is the single biggest enabler to doing that in 2023. For this to happen, the market needs to not just build, but to also converge towards an institutional standard in terms of technological, operating and regulatory models.
“Markets will evolve as regulations and standards mature and technology players will play a critical role in providing the foundational networked infrastructure that serves as a catalyst to accelerate this evolution.”
Seamus Donoghue, Chief Growth Officer at Metaco
7. DLT is taking time: And our expectations are increasingly long-term
The more closely we work with DLT and digital assets, the more we are aware that wide-scale market adoption is going to take time.
In 2022, 19% of firms expected to derive returns from their DLT investments within the same year. Largely in the crypto-currency space, firms were rushing to offer and monetise new client capabilities.
In 2023, much has changed. Urgent client demand for crypto-currency servicing has dissipated. High profile projects have underlined the importance of regulatory oversight (in the case of FTX) and the intricate complexities of ecosystem building at scale. And we have spent another 12 months working with our colleagues in risk, compliance and legal to take our new platforms to market.
For these reasons and others, the industry’s expectations of DLT have become increasingly long-term
– with 8% fewer respondents expecting their projects to deliver immediate returns (in the same year) and a corresponding growth in those expecting to see results in three to five years.
In the absence of immediate commercial pressures to service crypto-currencies fewer firms are keen to be cast as ‘market leaders’ in the world of digital assets, with the majority now looking to be ‘fast followers’ instead. There is seemingly little benefit in deploying vast operational and regulatory resources to forge a solitary path ahead in DLT. Better to just follow the leader.
We are more aware today than ever of how hard it is to realise DLT adoption at a large scale. Our DLT momentum continues to grow, supported by increasingly adept execution. But it is going to take us longer to realise.
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