FIX EMEA 2023: Old kids on the block – what blockchain technology means for traditional financial instruments and trading

Few people would deny that DLT is one of the most exciting trends in the commerce space. But with many different perspectives, it is clear that despite the appetite and ambitions in the market, there is still a long way to go before the technology becomes applicable.

“It’s a disruptive topic – we’re talking about removing some of the middlemen out of the chain,” warned one of the panelists at a session titled “Old Kids on the Block: What Blockchain Technology Means for Traditional Financial Instruments and Trading.”

One of the main points of contention in the session was the definition of terms – which highlights the early starting point where the industry remains.

“DLT is not blockchain. It’s the next step,” clarified one panelist. “Instead of having silos of data in many places, you can have just one ledger. It’s a layer that allows you to share immutable data between trusted parties . Usually people draw a parallel between blockchain and DLT, but actually it is a subset of DLT. The way transactions are validated is by adding blocks to the chain. DLT is broader than that. It has huge applications – across CBDCs, mail -trade – there are many opportunities and there has been a lot of progress, but we still have a long way to go.”

One of the biggest benefits of DLT, the panel agreed, is that everyone sees the same data at the same time. It increases trust, but it also brings its own problems – not least because the end of the line can lead to a loss of data ownership. If data belongs to everyone, then it belongs to no one – and those who currently make money from owning data may not be too keen on that path.

Pros and cons aside, however, it looks like there is no stopping the progress. In an audience poll, 45% said their firm had already invested in tokenized equity bonds, because the token economy and DLT will play a big role in the future; while 20% are working on a new product process to get it ready soon.

The panel noted that the main benefits of DLT for the current traditional trading model will be seen first for the buy side: including a compression of the trading life cycle, which means the speed at which they can reallocate their assets should increase, making things more efficient. “With the transition to T+1, it is estimated that up to 40% of capital can be redeployed,” said one panelist. “Imagine what nuclear, T+0 settlement could do for industry?”

Interoperability is another key theme in DLT, while the panel agreed that standardization would be a key driver of efficiency in the traditional industry, so it will also be key when we talk about tokenization and digital assets.

Identifiers will also be crucial. “A new digital identifier is now being included in the identification fields of the FIX protocol,” explained one panelist. “A specific security type – digital – has also been added to FIX, which will be useful when distinguishing between different types of assets. A combination of identifiers may need to be changed to make this work, and anything that builds into FIX to help people do that.”

Data is the new gold for the traditional industry, but it is also the key to digital assets. “We need data in real time, on a millisecond basis,” said one panelist.

Overall, the conclusion was that while the potential is huge, there is still a lot of work to be done before traditional trading protocols can really benefit.