What can help us scale?
With DLT and digital assets still emerging in their maturity, we have a long way to go to reach large-scale industry adoption. What factors will help us to move faster towards that point – and where can we be looking to accelerate DLT’s adoption in 2023?
The case for DLT still isn’t clear for 30% of us
As much as the operational benefits of DLT are becoming clearer each year, so are the costs of deployment, the challenges involved in scaling and the trade offs that need to be made. For this reason, the case for DLT adoption continues to be the single largest obstacle to DLT’s continued growth – and it is blocking 10% more firms from progressing their DLT ambitions this year than last.
Progress is being made. Questions around the legal status of digital assets appear to be dissipating (as jurisdictions such as Luxembourg see growing DLT project volumes and as the EU Pilot Regime, MICA and others provide a baseline of regulatory clarity);
and there is growing confidence amongst firms in their ability to build ecosystems around their platforms. Yet unfortunately, these advances are being offset by liquidity limitations (see above), increased privacy concerns and continuing challenges around legacy platform integration.
In 2022, clients were asking for crypto-currency capabilities across brokerage and custody – making the case for investment comparatively simpler. As we focus more on cost savings in 2023, the above issues are making the case for DLT and digital assets challenging and the return-on-investment less compelling.
DLT as a liquidity driver: 63% see a major liquidity benefit of DLT
Arguably, this is partly because we are understating the business case for DLT. Alongside operational benefits, only 7% of firms have run projects in 2023 with the objective of deriving liquidity and treasury benefits from their platforms – most of whom are broker-dealers. We seem increasingly comfortable in sizing potential headcount efficiencies and time-improvements from DLT, but we are still extremely vague in our definition of the benefits of accelerated issuance, delivery-versus-payment settlement or of settlement certainty, for example.
Yet 63% of firms expect these capabilities to generate significant P&L improvements to their firms. As we are beginning to see, DLT is removing weeks from bond issuance cycles, it is helping banks to transform or even remove their entire overnight funding needs (through intraday repos) and it is giving firms the choice of how much balance sheet they want to commit in settling with each counterparty. Whilst there are costs that also need to be taken into account (such as pre-funding), the opportunity for DLT to transform the lives of ALM and treasury departments is significant – and adds significant, differentiating value to the case for DLT adoption.
….yet only 4% of today’s projects include finance or treasury
Ostensibly the problem is that we are not engaging with the people whose lives we could transform. Over half of the average DLT project team in 2023 is made up of IT, product and innovation managers – with only 4% representation from the balance sheet side of the business. We know that treasury benefits are harder to quantify and measure but, with so little representation, it is no surprise that our ability to frame, document and realise these benefits of DLT is still rudimentary.
How can we meaningfully accelerate DLT adoption in 2024? Get finance and treasury in the room – and begin learning how to add a treasury and balance sheet dimension to our DLT business cases.
Risk, Compliance and Legal: The last to know?
No DLT project can be approved or operationalised without a clear risk framework, an oversight model and a contract (to document and attribute risks) – putting risk, compliance and legal functions squarely on the critical path to DLT realisation.
Today, only 17% of our DLT project teams include representation from these areas and, anecdotally, these departments are invariably called on only at the last minute, often only when sign-offs are needed. Numerous leaders in DLT cite this as a core problem today. By involving control functions late in project cycles, they form long blockages (as they move up the digital learning curve from zero to the point where they can document and manage DLT’s risks) and trigger time and cost over-runs which further harm the case for continuing DLT investment.
Given that no DLT project can move ahead without them, control functions need to be included at project inception in order to optimise returns and investments into DLT.
DLT isn’t the right technology for 20% of sell-side projects
With most of the industry looking to retain private networks and few firms willing to operate blockchain nodes today, a pressing question in the business case for DLT is simply whether it is the best answer to the problem. If we are looking to derive only data consistency and greater automation (over a private network), then DLT can be an expensive and highly complex technology – especially when compared with centralised (often cloud-based) platforms and smart contracts.
For this reason, projects that begin as DLT projects can shift towards using centralised databases as a first phase – with the flexibility to then embed blockchain technology later in the product roadmap.
This accelerates development, reduces project costs and helps firms to achieve their short term aims - whilst leaving the door open for DLT’s potential impacts later on.
Building DLT as a future design capability – not a present-day requirement – is a core step today in the long-term realisation of DLT’s benefits. By being discerning but strategic in our choice of technologies, we are enabling our product development to keep step with our gradually deepening knowledge of DLT and its benefits.
Growing the ecosystem: “How can DLT and digital assets reduce bid-offer spreads?”
And what about the investor? With the role of DLT in the portfolio still unclear and the case uncompelling (see above), we are seeing up to 50% of asset owners disappointed by their DLT and digital asset projects – and 60% of wealth managers opting for other technologies in their projects (instead of DLT).
There is a continuing belief that DLT and digital assets can drive market liquidity through improved transferability of securities (such as funds or private assets), through increased mobilisation (and financing) and through greater investor access (by fractionalising issuances). So far in 2023, few of these benefits have been realised or quantified – leaving many investors still asking “how can DLT drive liquidity?”
Answering this question remains the next major frontier in the adoption of DLT and digital assets – carrying with it a whole new range of benefits.
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