Solidifying the Network for Distributed Ledger Technology in Capital Markets

Nearly 80 percent of financial institution executives believe that distributed ledger technology will significantly transform capital markets within the next three years. But infrastructure technology will be the linchpin for how well DLT applications and solutions are adopted and perform in the fintech, institutional trading and security arenas.

“The next big thing” is a clichéd phrase that gets passed around and applied to almost any new idea in any industry; suffice it to say, it’s a bit overused. But there are few innovations emerging in the capital markets space that are more deserving of the title as “the next big thing” than distributed ledger technology (DLT). While it still might be early days to point out specific applications, its potential as a transformative innovation is undeniable.

The vast majority of financial institution executives – nearly 80 percent, according to a Bain & Company survey – believe that DLT will not just impact, but significantly transform, capital markets within the next three years. About just as many expect that their organizations will adopt DLT solutions by 2020 as well.

As more of these adopters – such as enterprises, retailers, market operators and central banks – begin to integrate DLT into their operations, whether to start an exchange with DLT or utilize DLT for cash and security settlement transactions, having a sound network infrastructure in place will be essential.

In a rapidly transforming global market, infrastructure technology is going to be the linchpin for how well DLT applications and solutions are adopted and perform in the fintech, institutional trading and security arenas.

DLT in Fintech

Many of the new DLT applications we see coming up in the capital markets space today are geared more toward the middle and back offices. Fintech developers are coming up with smarter and more innovative ideas every day to fulfill these needs. But those smart ideas need the right networking infrastructure in place to support them.

DLT requires either completely new infrastructure for this support, or changes to existing infrastructure to accommodate the new applications. What shape those changes ultimately take depends on the applications in question, but connectivity, hosting and market data capacities are all essential to ensure DLT solutions are being properly integrated and leveraged. Rather than create DLT-friendly patchwork networks after the fact, infrastructure providers can maximize their impact by talking with fintech and regtech developers ahead of time, to make sure that their infrastructure and data needs are understood before their DLT-based applications are released.

Another thing to consider is the deployment model of such new applications in a cloud environment. As capital market participants warm up to the cloud deployments, it’s easy to see how such DLT applications could be used to leverage the cloud or multiple clouds. Once this happens, an ecosystem approach to connectivity solutions, like a financial extranet, becomes more attractive and viable.

DLT in Institutional Trading

We’re also seeing DLT-based applications make their way into the institutional trading side of the capital markets. It’s still early days in this space; we first saw a practical use of DLT solutions with digital currencies on the retail side, but today, there are a number of consortiums and proofs of concept focused on DLT solutions for institutional trading. Like with fintech, these seem primarily geared toward middle and back-office applications, taking advantage of DLT’s potential for simplifying how financial firms can build, secure and store records and transactions.

Market operators and central banks are also making moves to begin adopting DLT assets into their applications, making it increasingly clear that when it comes to using DLT for the institutional segment, it’s not a question of if, but when.

DLT in Network Security

One element of DLT that financial firms should keep an eye on is their security applications. DLT components aren’t just for fintech or trading applications; they can be leveraged for network security purposes as well. For instance, DLT’s blockchain hashing and encryption methods can be re-used to encrypt traffic moving along the network and at rest, even if it isn’t for typical DLT-related applications.

Of course, different sensitivities to security and the nature of specific data in transit on the network mean not everyone is going to share the same priorities in their security models. But the ability to encrypt data from layer 1 all the way to applications is an increasingly growing area of focus for the capital markets – and one that is in DLT’s capacity to fulfill.

Laying the Groundwork for DLT in the Capital Markets

With DLT making its way into capital markets – boasting a versatile array of capabilities that can be used for fintech, institutional trading and network security applications – building out a solidified infrastructure now has to be considered by retailers, enterprises, central banks, market operators and other firms likely to use DLT. The sooner these users and capital markets institutions align themselves with infrastructure providers building the advanced metropolitan networks needed to carry traffic generated by DLT-based applications, the faster they can capitalize on upcoming applications built with DLT technology.

Come 2020, when roughly 80 percent of financial firms are going to be taking advantage of DLT to encrypt their network data, build simplified databases of transactions and records, and bolster their middle and back-office applications, don’t be part of that 20 percent that’s still stuck in the past.