Embracing DLT to power the future of capital markets

Over the last few years, Distributed Ledger Technology (DLT) has emerged as a central force in the digitalisation of financial services in general, and of capital markets more specifically. On this occasion, Europe has been in the driving seat of these developments and managed to build a certain competitive edge over other regional blocks. This has been facilitated by the European Commission’s Digital Finance Strategy, unveiled in September 2020 and accelerated by its subsequent execution. This led to the emergence of new legislative frameworks such as the Markets in Crypto-Assets Regulation (MiCA), the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime for Market Infrastructures (DLT Pilot Regime) – all of which are looking to leverage the numerous benefits of a technology that has the potential to revolutionise the functioning of capital markets. 

Improved efficiency and transparency across the primary and secondary markets

DLT's impact on the primary market is particularly noteworthy. By operating on a decentralised, immutable ledger, DLT reduces the time and cost required to prepare, process and complete a new issuance of securities and enables faster time-to-market. This, in turn, fosters an environment where issuers and investors can engage more easily and directly with each other, enhancing security and operational efficiency while reducing administrative burdens. 

DLT can also help the secondary market activity prosper, as its technology offers instantaneous and around-the-clock settlement operations, supporting fractionalisation of otherwise less accessible assets. On one hand, this allows for the democratisation of assets, making them more accessible to a wider range of investors, while also improving transparency and speed. Issuers and investors can thus benefit from increased liquidity in a more robust secondary market, which should ultimately make capital markets more accessible. 

Regulation, infrastructure and mass adoption to determine DLT’s longevity

While the potential of DLT is undoubtedly promising, the adoption of the technology itself is still in its early stages, and the long-term role it will play in capital markets ultimately depends on its collective deployment and adoption. If we are to reap the full benefits of DLT, key capital markets players must take proactive steps in promoting the visibility of native DLT instruments, actively advocating for their broader adoption and agreeing on common standards. 

More importantly, having both the right infrastructure and regulations is key in enabling DLT's development across capital markets, and while the DLT Pilot Regime is certainly a step in the right direction as far as Europe is concerned, its temporary nature and some of the limitations it contains do raise some question marks about its actual application and its impact on the long-term. 

Luxembourg – driving the digitalisation of capital markets

Luxembourg has been a long-time advocate of the digitalisation of capital markets. Among the EU member states, it took an early lead by introducing a comprehensive legal framework facilitating the use of DLT in financial transactions and securities issuance. Not only has this helped strengthen Luxembourg’s position on the global stage as a leading financial hub at the forefront of the digital transition, but it has opened up the door for global capital markets players looking to leverage this technology to consider developing their offering out of Luxembourg. 

LuxSE - setting a precedent for DLT-issued securities

In line with Luxembourg’s progressive digital agenda, the Luxembourg Stock Exchange (LuxSE) aims to contribute to the digitalisation of financial markets, encouraging the adoption of cutting-edge technologies that can help develop more efficient capital markets in a safe and resilient way. 

In January 2022, LuxSE became the first EU-based stock exchange to register three native securities tokens on its Securities Official List (LuxSE SOL), marking a significant step in making DLT securities mainstream. In order to support this new development and facilitate issuers’ adoption, LuxSE released its own Guidelines for DLT Financial Instruments, outlining additional information specific to that technology to be disclosed by issuers to investors. 

Since then, LuxSE has consolidated its market leading position through the registration of several DLT-issued securities, including the European Investment Bank’s first ever digital Climate Awareness Bond in June this year – the first DLT bond to be displayed on the Luxembourg Green Exchange (LGX), the world's leading sustainable finance platform. And work continues relentlessly to further progress the adoption of these instruments, with their admission to trading on LuxSE markets being the next milestone on the horizon. In parallel, LuxSE experts also contributed to LuxCMA’s Proof of Concept released in April 2022, outlining how to structure a DLT debt issuance in Luxembourg.  

Shaping the future of capital markets

As the use of DLT continues to gain momentum and shape the financial landscape, regulatory frameworks and market players will play a crucial role in determining its success and longevity. Capital markets players ought to embrace this technology that has the potential to streamline processes, increase opportunities and reduce complexities. In parallel, policymakers must strike a balance between fostering innovation and safeguarding market integrity by introducing clear and well-defined regulations that provide the necessary clarity and predictability for businesses and investors, while addressing potential concerns surrounding privacy, data protection, resilience and market stability.