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(Kitco News) – The London Stock Exchange Group (LSEG) is developing a new digital markets business that will make it the first major exchange to utilize blockchain technology to offer extensive trading of traditional financial assets.
According to a report from FT, the company has been exploring the potential for a blockchain-powered trading venue for about a year, and recently came to the decision that it would move forward with the plans.
Murray Roos, head of capital markets at the LSEG, said the company reached an “inflection point” in which it decided to go ahead with the project and stressed that the exchange was “definitely not building anything around cryptoassets,” but is looking to use blockchain technology to improve the efficiency of buying, selling and holding traditional assets.
“The idea is to use digital technology to make a process that is slicker, smoother, cheaper, and more transparent… and to have it regulated,” Roos said. He noted that the LSEG has waited until public blockchain technology was “good enough” and investors were ready before making this move.
Roos said that if everything goes according to plan, the LSEG would be the first large global stock exchange to offer investors an “end-to-end” blockchain-powered ecosystem. He said that while others have implemented the technology in parts of the life cycle for financial assets, no one has utilized it for the entire process, from issuance to trading, reconciliation and settlement.
Addressing concerns related to competition with LSE’s traditional business, Roos said the digital markets venture was created to complement that system by focusing on the growing field of digital assets and asset tokenization.
“We’re very committed to the London equity markets,” Roos said. “What we are seeking to do is continue to do what London has always done and continue to innovate.”
LSEG hopes to have its first blockchain-powered market up and running within the next year, and the firm is already in talks with regulators in multiple jurisdictions, as well as the government and Treasury in the UK, to gain regulatory approval. Julia Hoggett, head of the London Stock Exchange, will lead the project.
“The ultimate goal is a global platform that allows participants in all jurisdictions to be able to interact with people in other jurisdictions completely abiding by rules, laws and regulations, potentially multiple jurisdictions simultaneously, which is something that hasn’t been possible in an analog world,” Roos said.
He added that the digital business will likely focus on private markets initially since activity there is notably cumbersome and opaque, and will expand to other assets once the model has been proven effective. “The technical opportunity of digitizing a bunch of traded asset classes is extremely high,” Roos said.
“The obvious first potential outcome of this LSEG entry into tokenization is that cash and cash equivalents will be immediately more efficient,” said Ralf Kubli, a board member of the Casper Association. He added that the firm is “looking to get into instruments where they lost market share” by offering private debt opportunities that will lure investors back to LSEG and away from other infrastructure providers.
“Several initiatives backed by serious commitments from the largest banks in the world are targeting exactly this kind of settlement infrastructure for financial assets which would then live on DLT [distributed ledger technology] environments,” he said.
“Also, if LSEG wants to be able to serve the likes of Fidelity or Franklin Templeton – who have clearly stated that they want to access private markets (because of the lack of IPO and public equities for differentiated strategies) – then they need to have such infrastructure as LSEG is proposing, otherwise they become irrelevant,” Kubli said.
This move by LSEG comes as tokenization – the process of creating digital representations of stocks or bonds that can be tracked using blockchain technology – is gaining traction in global financial circles.
“We are finally reaching the age of digitization in the world of finance,” said Mona El Isa, founder and CEO of Avantgarde, one of the world’s first institutional-grade DeFi companies. “Despite years of disregarding it, this latest move from the LSEG signals that traditional finance looks finally set to embrace the potential of blockchain technology.”
She noted that “The intriguing aspect of the LSEG announcement is that it emphasizes a desire to use blockchain technology to make it more efficient to buy, sell and hold traditional assets.”
“It’s clear that financial markets are set to undergo an era of marked transformation in the coming decade, as awareness grows about the potential for blockchain and smart contract-based technology to transform financial services,” Mona said. “This is why I left an established career at Goldman Sachs and Jabre Capital – because I saw first-hand how blockchain technology can make asset management far more efficient, transparent, safe and cost-effective.”
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