Distributed ledger technology: Implications of blockchain for the securities industry

Abstract

Distributed ledger technology (DLT) is emerging as a potential disruptive force in the financial services industry and has garnered significant interest from various stakeholders. The technology offers the potential of significant efficiency gains and risk reduction, but also brings with it a new set of risks such as those related to security and privacy. Some argue that it could change the status quo of how securities are issued, traded and cleared, and redefine the roles of various market players. This paper provides an overview of distributed ledger technology and explains key features such as public versus private networks, the use of digital assets, and the general process for conducting and verifying transactions and recording them on a DLT network. It then highlights some key applications being explored in the securities industry including those in the equity, debt and derivatives markets, and in the utilities space. Further, the paper explores the potential impact of the technology in key areas of market efficiencies, transparency, role of intermediaries and operations, and highlights related benefits and risks. Many of the securities laws that the Financial Industry Regulatory Authority (FINRA) is charged with overseeing are potentially implicated by various DLT applications.