Global trade association for regulated financial exchanges finds overwhelming interest in blockchain tech among members

The World Federation of Exchanges (WFE) recently published a 14-page report outlining the results of an in-depth survey on how exchanges and financial market infrastructure providers use blockchain technology, and what their perspectives are.

Founded in 1961, the WFE is a trade association acting on behalf of 99 organizations, including affiliate members, clearinghouses, and 63 regulated exchanges listing over 45,000 companies from across the globe. The total market capitalization of the association’s members is US$64.2 trillion, with a trading value of US$111 trillion, which is over 65% of the world’s GDP.

In July 2016, the WFE and the Affiliate Members Consultative Committee (AMCC) of the International Organisation of Securities Committees (IOSCO), surveyed a range of Financial Market Infrastructures (FMIs) across developed and emerging markets.

Nasdaq, the DTCC, BM&FBOVESPA, China Financial Future Exchange, the CME Group, the Japan Exchange Group, and the TMX group were among the extensive list of 25 respondents representing exchanges, central counterparties, and central securities depositories.

“The overwhelming majority of FMIs (21/25 respondents) indicated they were either investigating the applicability of DLT to their environment or actively pursuing DLT initiatives (to the point in one instance of already having deployed a DLT-based application).”
— – World Federation of Exchanges

The 26 survey questionnaire based on Distributed Ledger Technology (DLT), “including blockchain,” was developed in collaboration with IOSCO’s Committee on Emerging Risk, with the survey results feeding into broader IOSCO research into financial technologies and their application in capital markets.

The International Organization of Securities Commissions, established in 1983, is the international body that brings together the world’s securities regulators, and is recognized as the global standard setter for the securities sector.

IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation, and works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda. The international body includes securities and futures market regulators covering over 95% of the world’s securities, in a total of 115 different markets.

In its 2015 annual report, the Chair of the IOSCO Board, Greg Medcraft, revealed that IOSCO has been paying attention to disruptive technology. Board roundtables and stakeholder meetings have, focused on digital disruption and developments, “such as distributed ledger technology (blockchain).”

IOSCO Secretary General David Wright confirmed the interest in blockchain technology at the Annual General Meeting and Conference of the International Council of Securities Associations in Stockholm last May.

“When looking at the digital future, we are not only conscious of emerging risks but also opportunities in capital markets. Fintech is one such area, and we are looking at the effects of digital disruption. This includes our work on crowdfunding, robo advice and work on blockchains or DLT.”
— – David Wright, IOSCO Secretary General

The survey produced an overwhelmingly positive response towards the technology, prompting a caution from the WFE. Those FMI’s not engaging with blockchain tech were unlikely to have answered the survey.

“This report does not presume to represent the views of the entire industry or membership,” states the Executive Summary. “As the respondents include some of the more significant early-movers in the DLT capital markets space, we believe that there are certain themes and recommendations that are noteworthy.”

The majority of respondents claim to have their own blockchain initiatives. Seven have allocated a budget for blockchain initiatives, while 13 FMIs expected to allocate a budget in the future. Many of them also participate in industry collaborative groups such as the Linux Foundation Hyper Ledger project and the Post-Trade Distributed Ledger Group.

One of the most well-known group is the R3 CEV Consortium, constituting 60 financial institutions, but they certainly aren’t alone. China has a consortium of its own called the Financial Blockchain Shenzhen Consortium (FBSC), involving 25 firms. A French consortium, launched by the Caisse des Dépôts Group, has initial 11 members. There’s also a Dubai Global Blockchain Council, with over 30 UAE-based participants.

In most cases FMIs are focusing on applications which aim to create process efficiencies and cost savings, though some are also pursuing new service lines and revenue opportunities.

“While some FMIs will approach DLT as a source of competitive advantage, the current collaborative approach is likely to persist,” states the report. “FMIs, technology innovators and market participants acknowledge that many of the more significant benefits of DLT will derive from standardisation and broad user-acceptance.”

“Regulators and respondents seem to largely agree that what is most important at this point is ensuring open dialogue regarding the evolution of the technology, and the sharing of information and best practice examples. Respondents stressed the importance of adopting a collaborative approach to a technology that was still evolving.”
— – World Federation of Exchanges

The majority of respondents believed it was not only possible, but likely for non-financial players to take the lead in development, “given these firms would tend to be less regulated than financial services firms.”

This was not the same, however, as agreeing that nonfinancial firms would be in a position to rollout DLT solutions in capital markets without the participation of existing providers.

Respondents have adopted a wait and see approach, in spite of the promising nature of the new technology. They highlighted several risks that need to be addressed such as risks of maintaining security standards across a decentralised database, legal and regulatory uncertainty, and concerns around scalability.

“Given the relatively nascent state of the technology – particularly as applied to capital markets – FMIs are uncertain about the extent to which the  technology will live up to its promise,” states the report.

Respondents also disagree as to whether or not the technology’s adoption in capital markets would fundamentally change the nature and structure of the industry. Some see fundamental change, including much more peer-to-peer activity and less central clearing. Others believe that the fundamental roles performed by financial market participants, custodians, exchanges, central clearing houses, and regulators will not change materially.

“In the longer-term respondents felt IOSCO may have a role to play in setting harmonised, global standards, and ensuring any technical or regulatory standards that are issued, are aligned/are not in conflict with other standards (for example, relating to data protection and cyber-security).”
— – World Federation of Exchanges