The Future of Distributed

Ledger Technology in
Capital Markets
 “The genesis of blockchain can be traced back to David Chaum’s dissertation
in the 1980s or the Satoshi Nakomoto papers published in 2008. Either way,
we have had many years of hype-cycle around blockchain and its
capabilities. There have been plenty of false dawns, but hype is at last giving
way to practical and pragmatic use cases.
The capabilities of the current generation of blockchain technologies,
and the willingness of financial market participants to collaborate around
common standards, is driving uptake and increasing interconnectivity
between institutions. This is likely to lead to trusted networks that create
unparalled levels of effectiveness and efficiency in capital markets.”
Sukand Ramachandran, Managing Director and Senior Partner, Boston Consulting Group

“Since mid-14th century Italy, at the advent of modern banking we have

used the terms ‘nostro’ and ‘vostro’ – ‘mine’ and ‘yours’ as a representation of
ownership on each independent ledger… blockchain as a shared, distributed
ledger means the market can move to ‘ours’…This creates the opportunity for
a fundamental change in how the infrastructure of markets work, driving
efficiency and enabling further developments in how we manage risk and
enable the flow of capital. Capital markets have always driven towards
efficiency; the deployment of blockchain technology is just another step in the
continuing evolution of the market. We believe that in the current phase of
market evolution, blockchain technology is playing a growing role, and it will
continue to, becoming a fundamental component of capital markets.”
Scott Lucas, Head of Markets DLT, J.P. Morgan

2
Foreword
Distributed ledger technology (DLT) could reshape capital markets. From securities issuance, to settlement, trading,
and servicing, DLT creates benefits that include faster processing, more transparency, lower costs, and reduced
risks. DLT is also a catalyst for innovation—democratizing access to capital and helping issuers and other market
participants unlock new opportunities. The net impact of these advancements is a step change in the way that markets
could operate, and an opportunity to embrace new ways of working that will shape the evolution of capital markets
for years to come.
Capital markets have historically been characterized by intermediation. At every stage of the securities lifecycle,
banks, brokers, information providers, and other market participants play an important role. The result is a highly-
complex environment, in which costs are often high. Against this backdrop, DLT remains a work in progress. However,
recent years have seen an acceleration in adoption, with banks and other market participants graduating from
experimentation to more practical, real-world initiatives. Indeed, in some activities, DLT is beginning to push the
boundaries in efficiency and effectiveness.
DLT utilizes a shared database maintained by multiple participants across a decentralized network. The database
provides a golden source of data and record keeping. An underlying principle of the technology is that it requires
collaboration to make it work. Without a compatible approach to data, taxonomies, and processes, distributed
ledgers will not function effectively. Based on this understanding, the recent period has seen increasing numbers of
partnerships across capital markets. One example is the collaboration between Marketnode, a joint venture between
Singapore Exchange and Temasek, and a consortia of banks to create DLT-based solutions. This represents a marked
departure from the “entity-centric” innovation of the past.
Of course, there remain significant hurdles to adoption. These include regulatory uncertainties, the need for more
standardized data and record keeping, and the implications of enhanced transparency on distribution and liquidity
provision. Multiple DLT platforms are in the process of development, and further work is required to establish
interoperability and build trust in their capabilities. Furthermore, increased collaboration is required to agree common
standards, workflows, and operational checks and balances.
This paper, a publication by Boston Consulting Group in partnership with J.P. Morgan, explores the application
of DLT in capital markets. It addresses how the technology is developing and explores its impact through the securities
lifecycle. Along the way, it discusses how DLT is solving, or could solve, pain points in capital markets processes,
and become a powerful driver of innovation.
As DLT matures, the onus is on market participants to act. Indeed, with the DLT proof of concept established,
the future will be about collaboration and execution. From the C-Suite down, there is a need to fully understand
the risks and opportunities, and to formulate strategies for engagement. That will mean gauging potential impacts,
preparing for adoption, and building solutions. Many participants are already moving forward and seeing promising
results. Their investments will help early adopters insulate against technology debt, establish an innovation agenda,
and lay the foundations for the digital capital markets of the future.

The Future of Distributed Ledger Technology in Capital Markets 3

 Trends in capital markets and the path to DLT
DLT is perhaps best known as the underlying enabler of cryptocurrencies such as Bitcoin and Ether, but its
potential outside of cryptocurrencies is vast. Indeed, DLT has wide applications across capital markets, including
in the native issuance of securities, tokenization of assets, and the creation of Central Bank Digital Currencies
(CBDCs). This paper primarily focuses on the first of these.
The adoption of DLT in capital markets represents a natural next step in the dematerialization journey that
has taken place both in the use of money and in capital markets. (See Exhibit 1). While technological change
such as electronification has taken capital markets to new levels of efficiency, DLT can go further—offering
cost, liquidity, transparency, and innovation benefits. From securities issuance, to trading, clearing, settlement,
and securities servicing, DLT’s unique characteristics have the potential to enhance processes across the
securities lifecycle.
To obtain the full benefits of natively-issued digital assets, a cash-on-ledger framework is required, whereby
digital assets can be exchanged for digital currencies in the form of either CBDCs, stablecoins or other cash-on-
ledger solutions. While CBDCs are beyond the scope of this paper, it is important to acknowledge the growing
interest among financial institutions and central banks in these currencies. According to a Bank for International
Settlements survey, approximately 90 percent of central banks are exploring the use of CBDCs, reflecting policy
makers desire to continue to provide safe and efficient payments processes. Meanwhile, stablecoins such as USDT
are supporting billions of dollars of financial transactions, mostly in the crypto space. In parallel, several leading
banks are exploring cash-on-ledger solutions, and J.P. Morgan has begun offering blockchain-based deposit
accounts. Private and public DLT platforms are the enabling architectures for these new versions of money.
Beyond CBDCs, there have also been significant developments in the tokenization of traditional assets. This entails
recording existing assets on DLT platforms. Initiatives are underway to explore the potential for tokenization
across a range of asset classes, from real estate all the way through to art. However, a major area of focus and
where there is a significant opportunity in the near term, is in native issuance via DLT. There has been a wave of
DLT activity in bond and loan markets, as well as broader initiatives in other asset classes.

4 The Future of Distributed Ledger Technology in Capital Markets

Exhibit 1. DLT is an evolutionary step in market development

Historical evolution in the use of money

Digital currencies
Paper and digital represented on distributed
currency payments. ledgers. Currency only
Paper currency backed Paper currency used Currency represented exists in digital form with
Coins used as a means of by precious metals but not backed by in digital ledgers no paper-based forms
exchange (e.g., gold, silver) precious metals of exchange

future state

Historical evolution in the transfer and recording of assets in capital markets

Assets exchanged via use of electronic Assets exchanged via

Assets exchanged via physical transfer communication networks. Electronic DLT platforms and asset
of paper-based certificates. Certificates records maintained on centralized ownership recorded on
represent proof of ownership ledgers serve as proof of ownership distributed ledgers

future state

How does DLT work in capital markets?

In simple terms, a distributed ledger is a digital database that is shared, recorded, and synchronised in
multiple places at the same time. The data is validated and maintained by multiple participants within the
system rather than by a single authority. Blockchain is a type of DLT through which data is stored as secure
blocks that are chained together using a cryptographic signature called a hash. Once a block or transaction
is validated and approved, it is added to a ledger. Once approved, the data is immutable in the sense that
any further changes are submitted as amendments, resulting in full transparency of how the data evolved.
This creates an environment in which trust is guaranteed and counterparties can operate with a single
version of the truth. There is no need for reconciliations, matching, or other data processing steps.
DLT supports native issuance of digital assets, allowing direct dealing between a wide range of investors
and significantly cutting settlement times. Trading can be peer-to-peer and around the clock, and smart
contracts can enable execution of corporate actions such as coupon payments. Smart contracts are
automatic digital instructions that are executed when pre-determined conditions are met.

Recognition of the potential benefits of natively issued digital assets has prompted fintechs, banks,
and other market participants to embrace DLT partnerships to develop solutions. In many cases, these initiatives
are starting to move from proof of concept to real life applications that can be scaled. (See Exhibit 2).
Examples include Societe Generale SFH’s issuance of €40 million of covered bonds registered on a public
blockchain and SIX Digital Exchange’s issuance of a CHF100 million digital bond using DLT, with Credit Suisse,
UBS, and Zürcher Kantonalbank as joint lead managers.

The Future of Distributed Ledger Technology in Capital Markets 5

 Exhibit 2. Select examples of digital bond issuance

September 2019 September 2020 April 2021 December 2021

Santander self-issued SGX completed its first EIB issued a Banque de France
a $20m digital bond digital bond issuance €100m digital issued a digital bond
on Ethereum replicating an SGD 400m bond on Ethereum on a blockchain with
public bond issue settlement in a CBDC

May 2020 January 2021 November 2021 July 2022

Société Général SFH Vonovia issued its first SDX issued a CHF 100m BME, BBVA and
issued €40m of covered digital bond of €20m digital bond IDB issued bonds
bonds registered on a registered using
public blockchain blockchain technology

Looking ahead, more widespread adoption of DLT solutions will be contingent on financial markets infrastructure
developing to accommodate digital assets. This will mean that market participants move away from siloed
approaches to technology development, address compatibility challenges, and create standardized data
and workflows. Our view is that while these challenges are significant, they are not insurmountable. Collaboration
and the measurable benefits of DLT outweigh the difficulties associated with implementation at scale.

6 The Future of Distributed Ledger Technology in Capital Markets

DLT capital markets opportunities
Through the securities lifecycle, there are pain points that currently inhibit capital markets efficiency and prevent
innovation and growth. These include siloed data structures, large numbers of agents, and entrenched manual
processes. In addition, workflows are often fragmented and non-standard, while timeframes are stretched,
leading to unnecessary costs. (See Exhibit 3).
Through automation and access to shared data and records, DLT has the potential to enhance capital markets
effectiveness, trust, transparency, and efficiency. Furthermore, the benefits are transmittable through the value
chain. One of the clearest impacts is on process effectiveness. DLT can enable a transition from multiple parties
managing their own records (usually across several internal systems) to data-synced processes and an immutable
multi-party source of record.
Issuance timeframes can be accelerated through greater ease of access to shared financial, legal and regulatory
data on-chain, as well as reduction of manual processes. In secondary markets, decentralized trading platforms
can facilitate extended trading hours across regions, and fractionalisation can provide the potential for enhanced
liquidity in select asset classes. Settlement risk can be reduced through the automation of clearing and settlement
processes and asset servicing can be improved through automation of corporate actions, such as coupon payments,
via smart contracts.

J.P. Morgan has utilised its in-house blockchain platform Onyx Digital Assets to facilitate repo transactions
and accelerate their settlement. The platform enables repo transactions to be traded, settled and matured
within a day, facilitating real-time transfer of cash and collateral and reducing settlement risk for clients.

USD balance On-chain USD

redemption; balance creation
Collateral Transfer to (principal & Collateral Token
Token Creation Deposit Account Interest) Redemption

Execution Settlement Pre-Maturity Maturity

Collateral Collateral Collateral

Repo Seller USD USD USD
Token Quote Request Token Token
(Cash Borrower)
submitted by
Party A and
accepted by
Party B

Collateral Collateral Collateral

USD USD USD
Token Token Token
Repo Buyer
(Cash Lender)

On-chain USD USD balance

balance creation redemption; Transfer to
(principal) Deposit Account

The Future of Distributed Ledger Technology in Capital Markets 7

 Exhibit 3. Lifecycle pain points and DLT efficiency gains

Value Chain Select lifecycle process pain points Select efficiency gains from DLT

• Siloed data and manual processes lead to

• Shared, permissioned access to all required due
process inefficiencies
diligence, legal and accounting data on chain
• Large numbers of agents
• Automation of manual processes
• High cost of issuance creates a barrier for
• Reduction in number of agents
Issuance low frequency and low volume issuers

• Fragmented liquidity • Creation of decentralized trading platforms

• Diversity of assets requires bespoke trading enabling accelerated trading and greater
processes transparency for select products
• Restricted trading hours • Enablement of extended trading hours
Trading

• Extended clearing and settlement timelines

• Automation of clearing and settlement
(T+1 – T+3) creates risks to counterparties
• Single, immutable record of truth on all
• Low data quality leads to reconciliation and
Clearing & transactions
trade matching
Settlement

• Fragmented and manual workflows facilitate

• Automation of workflows via smart contracts
transfer of assets
• Enablement of digital custody on-chain and the
• Siloed data can lead to complex and opaque
self-custody of assets
chains of custody
Custody

• Siloed data structures lead to inefficiencies in

communications • Automation of corporate actions via smart
• Manual processes facilitate execution of contracts e.g., coupon payments
corporate actions
Asset servicing

While we expect DLT can lead to improvements across capital markets, we expect the impact will be greatest
in asset classes that are either less mature, less digitized, or less efficient. For example, we see much more of
a functionality uplift in the $41 trillion corporate bond market, as well as in syndicated loans and securitized
products, which are less digitized and have lower levels of liquidity, than in the highly-liquid cash equities market.
(See Exhibit 4). Indeed, much DLT investment to date has focused on addressing pain points in markets such as
corporate bonds and syndicated loans.

8 The Future of Distributed Ledger Technology in Capital Markets

 Exhibit 4. Opportunities from DLT based on current initiatives and ease of implementation
by asset class

High
Securitized Products Private Debt Corporate Bonds

Private Equity Syndicated Loans

Commodity derivatives Carbon Offsets

Opportunities G10 Rates

& benefits
FX derivatives
from use
Medium
of DLT
Fixed Income derivatives

Equity derivatives

Cash Equities

Low High
Medium

Ease of implementation

Harvey balls indicate maturity of DLT market initiatives

DLT can also provide a platform for product innovation, creating flexibility for issuers and growth opportunities
for investors and other market participants. Product lifecycles can be significantly enhanced and customized
with smart contracts. They can support issuance in different currencies and maturities and automate dividend
or coupon payments based on simple if/when parameters. DLT can also enable emerging asset classes such
as sustainability-linked instruments and carbon offsets, as well as facilitate the creation of new products.
For example, DLT can enable issuers to tokenize dividend or coupon payments, allowing investors to access cash
flow streams without the need to own the underlying equity or debt instrument. (See Exhibit 5).

The Future of Distributed Ledger Technology in Capital Markets 9

 Exhibit 5. Select DLT-based product innovation across categories

Category Product

Sustainability-Linked-Securities
• DLT could simplify and expedite the issuance process and enable increased transparency into the
meeting of ESG covenants

Carbon Offsets
Enabling emerging • DLT could provide an enhanced infrastructure to scale this product e.g., through immutable and
assets trustworthy records, fractionalization of units to improve liquidity and smart contracts connected
to off-chain data sources

Fixed Income Cashflow Tokens

• DLT could enable issuers to tokenize the interest payments of a bond or loan to give investors
access to interest payments without owning the underlying debt instrument

Business Line-Specific Equity

• DLT could enable companies to raise additional capital for a specific business line by issuing equity
tokens for specific units targeted to investors that do not want to have exposure to all assets of
Unbundling
a company
existing assets
Equity Dividend Tokens
• DLT could enable issuers to tokenize equity dividend payments to provide investors who do not
want to have exposure to equity price fluctuations a pure income stream (i.e., token does not
confer any ownership or voting rights)

Recurring Revenue-Based Financing

• DLT could create a financing option for issuers to return a pre-determined portion of revenue as a
dividend; there is a small market today, but this could be expanded using DLT

Bespoke Coupon Frequency Bonds

Customising • DLT could enable corporates to issue bonds with bespoke coupon frequencies (e.g., monthly,
assets weekly) using smart contracts

Adjustable Equity Tokens

• DLT could enhance dividend payments or voting rights for investors utilizing smart contract
capabilities, depending upon length of equity ownership

Many applications of DLT in capital markets have already gone live, and we are witnessing a growing number of
initiatives whose scale and ambition is increasing. In corporate bonds, SGX collaborated with Temasek and HSBC
to complete a digital bond issuance, replicating a S$400m 5.5-year public bond issue and a follow-on S$100m
tap of the same issue by Olam International. The European Investment Bank (EIB) issued a €100m digital bond
on Ethereum in collaboration with Goldman Sachs, Santander and Societe Generale, with the payment to the
EIB represented on the blockchain via a CBDC. In syndicated loans, BBVA, BNP Paribas and MUFG facilitated
the issuance of a €150m syndicated loan for Red Electrica Corporation using DLT, while a new syndicated loan
platform, Versana, which launched in 2022, is aiming to digitally capture agent banks’ reference data directly
from its source on a real-time basis.

10 The Future of Distributed Ledger Technology in Capital Markets

Case study: Corporate bonds and lifecycle impacts
While DLT can have a transformative impact across capital markets, the corporate bond market stands out as a
significant area of opportunity. Bond lifecycles are subject to well-established workflows, but there are multiple
pain points, many of which can be addressed through the use of DLT.
Corporate bond markets are smaller than equity or government bond markets, less standardized, and in their
current evolution, less efficient than other asset classes. In the primary market the average issuance time is two
to three weeks for existing issuers and the cost of issuance can be high, due to regulatory requirements and
complexities in issuance. In the secondary market, settlement is usually on a T+1 or T+2 basis, creating settlement
risk. In over-the-counter secondary markets, it is common to see pricing inefficiencies and liquidity constraints.
Furthermore, siloed data structures create challenges for custodians and asset servicing. (See Exhibit 6).

Exhibit 6: Corporate bond market pain points

Value Chain Existing process Stakeholders Existing pain points

• Banks co-ordinate the structuring

• Siloed data structures and
and syndication of corporate • Issuers manual processes lead to process
bond issuances mostly via manual
• Banks inefficiencies
processes
• Agents • High cost of issuance creates a barrier
• Book build process involving banks
• Investors for low frequency and low volume
Issuance has seen little digitization in recent
issuers
years

• Fragmented liquidity
• Trading activity is largely conducted • Banks
• Manual trading processes
OTC • MDPs
• Pricing inefficiencies
• Price discovery is a manual process • Investors
Trading • Restricted trading hours

• Banks • Extended clearing and settlement

• Clearinghouses and central (T+1/T+2) creating risks to
securities depositories clear • Investors
counterparties
Clearing & and settle securities and cash, • CSD
post trade execution • Siloed data structures can lead to
Settlement • CCP manual reconciliation processes

• Custodians custody assets for • Investors • Fragmented and manual workflows to

investors post clearing and facilitate transfer of assets
• Custodians
settlement and support with post • Siloed data can lead to complex and
trade processing • CSD opaque chains of custody
Custody

• Siloed data structures leading to

• Custodians support their clients with inefficiencies in communications
• Issuers
applicable corporate actions (e.g., • Manual processes to facilitate
collection of coupon payments) • Custodians
execution of corporate actions by
Asset servicing issuers

The Future of Distributed Ledger Technology in Capital Markets 11

 DLT platforms can streamline many corporate bond processes. By providing a single source of truth, the
technology enhances the transparency of bond terms, transactions, and ownership. These platforms would also
intermediate the relationship between market participants and post-trade infrastructure and service providers.
Issuers can benefit from accelerated issuance timeframes, the ability to tailor bond issuance more effectively to
short-term needs, and reduced costs. Investors will have the opportunity to trade beyond the time constraints of
existing markets, experience accelerated settlement timeframes and will face a reduced risk of trade fails. Both
issuers and investors will gain from the simplification of asset servicing, with smart contracts facilitating the
automation of corporate actions such as coupon payments. (See Exhibits 7 and 8).
There will also be meaningful opportunities for innovation. This could include creating bonds with a bespoke
frequency of coupon payments, enabling fractionalisation of issuance, or facilitating greater customization,
with the ability to include tailored terms via smart contracts. The efficiency and innovation potential from DLT
could lead to increased participation from a broader range of issuers and investors. Through these benefits,
there is an opportunity to create a much more efficient and nimble corporate bond market.

Exhibit 7: A DLT-enabled corporate bond lifecycle

EXISTING CORPORATE BOND LIFECYCLE

Issuers Agents Banks Investors MDPs CSD CCP Custodians /

Asset servicing
SECONDARY TRADING
Processes and workflows
handled independently
ISSUANCE
POST-TRADE

Asset ledger Asset ledger Asset ledger Asset ledger Asset ledger Asset ledger Asset ledger Asset ledger All parties retain siloed
data. Payments and other
Cash ledger Cash ledger Cash ledger Cash ledger Cash ledger Cash ledger Cash ledger Cash ledger transactions calculated
independently

DLT BASED CORPORATE BOND LIFECYCLE

ISSUANCE SECONDARY TRADING POST-TRADE Mutualized workflows
across participants

Custodians / Asset Less intermediaries and

Issuers Banks Investors MDPs CCP unique parties across
servicing
value chain

Interoperable DLT platforms

Interoperable / connected capabilities across platforms provide a single source of
truth on bond terms, trade
DLT platform DLT platform DLT platform and settlement status,
Combined asset & cash ledger Combined asset & cash ledger Combined asset & cash ledger ownership and coupon/
repayment instructions

Note: Interoperability is inclusive of legal, operational, regulatory and technical interopability

MDP – Multi-dealer platform, CSD – Central Securities Depository, CCP – Central Counterparty Clearing House

With these benefits in mind, many banks and fintechs are currently working on projects to build native-issuance
bond platforms, issue assets, and create scalable DLT-based solutions across the value chain. Examples include
Goldman Sachs using Digital Asset Modeling Language (DAML) to develop its end-to-end tokenized asset
infrastructure. This will support the digital lifecycle across asset classes on permissioned and public blockchains.
In another initiative, Marketnode is seeking to build out an end-to-end DLT-enabled fixed income infrastructure,
with products focusing on digital issuance services and digital asset depository infrastructure.

12 The Future of Distributed Ledger Technology in Capital Markets

Exhibit 8: DLT benefits in corporate bond markets

Market participants Select Opportunities / Benefits Select Challenges / Risks

• Accelerated issuance timeframes

• Lower cost of issuance
• Increased frequency of issuance and potential
• Maintaining natively issued and non-DLT based
for issuance at a smaller ticket size
bonds in parallel
• Enhanced traceability of transactions and
Issuers
clarity on bond ownership
• Automation of asset servicing

• Accelerated issuance timeframes with

potential for more issuance • Navigating changes in transaction economics
• Reduced costs from increased digitization • Supporting parallel DLT and non-DLT based
of issuance and automation of post-trade platforms
Banks processes

• Enhanced secondary trading liquidity

• Extended trading hours
• Accelerated settlement timeframes
• Supporting parallel DLT and non-DLT based
• Reduced risk of trade fails platforms
Investors • Automation of asset servicing
(Asset managers,
pension funds etc)
• Enhanced real-time insights into portfolio risk
and performance reporting

• Increased revenues from more frequent • Supporting parallel DLT and non-DLT based
issuance of bonds platforms
MDPs

• Lower costs from automation of corporate

• Lower fees if clients choose to self-custody
actions
• Elimination of some existing roles
• New digital asset custody business
Custodians

• Providing oversight or governance of DLT • Adapting existing roles and responsibilities

platforms to a DLT-based ecosystem
Infrastructure
(CCP, CSD)

• Automation of lifecycle events and greater

• Potential for new lines of business transparency poses a risk to existing business
Other intermediaries models
& agents
(Trustees, transfer agents)

The Future of Distributed Ledger Technology in Capital Markets 13

 Building successful DLT platforms
To realize DLT’s full potential and achieve widespread adoption, DLT platforms must achieve the depth and scale of
traditional platforms and meet the needs of issuers and investors. This will require a specific set of characteristics.
First, they must be able to scale to handle tens of thousands of transactions a second, which is still beyond the
reach of most platforms. That said, we are seeing progress towards this goal in private blockchains such as
Quorum and SETL.
Another prerequisite for adoption at scale is a set of common standards, including in areas such as DLT platform
governance, data, digital identity, and network upgrades. The Enterprise Ethereum Alliance and Hyperledger
Foundation are among those leading efforts in these areas. A critical component of these common standards
will be the ability to facilitate interoperability between DLT platforms. Interoperability will provide the means for
DLT platforms to interface with each other and with existing technology infrastructure across the securities value
chain. Interoperability will provide market participants with the means to communicate and transact across DLT
platforms, and this will support viability and adoption, and enable scale. Meanwhile, interoperability between DLT
platforms and existing market infrastructure will prevent the high cost and impracticality of decommissioning
significant components of existing trading and post-trading systems. Still, it is conceivable that overall technology
costs may rise in the near term as a result of the parallel operation of traditional and DLT-enabled infrastructure.

EEA and Hyperledger: working together

The Enterprise Ethereum Alliance (EEA) sponsors the development of specifications and standards
with a goal to be the global standards organization for the enterprise Ethereum blockchain. The EEA
standard specification and associated testing model aims to drive interoperability and help accelerate the
development of the enterprise blockchain market. EEA member organizations have collaborated to drive
enterprise Ethereum standards with the aim of accelerating adoption of Ethereum blockchain solutions.
Hyperledger fosters the development of open source software for establishing, managing, and connecting
enterprise blockchain networks. EEA and Hyperledger have similar objectives and complementary
approaches to achieving them. They are members of each other’s organization, enabling collaboration
across working groups and their respective developer networks. For example, EEA community members
working on specifications and standards have the potential to collaborate with Hyperledger on software
implementations of those standards.

14 The Future of Distributed Ledger Technology in Capital Markets

For many market participants, there are concerns around cybersecurity and trust, driven by the risk of fraud,
interruptions to the network, and loss of assets. Therefore, an important aspect of scaling DLT platforms will be
to demonstrate they have effective cybersecurity protocols in place. DLT platforms will also need to ensure they
can support stringent KYC and AML processes for all network participants to meet regulatory requirements.
The market will need clear regulatory and legal frameworks for digital assets and the use of DLT both domestically
and across borders. Laws and regulations will need to be adapted or created to specifically address applications
of DLT in capital markets so that market participants are clear on the frameworks that govern them. Data privacy
will be a key issue; shared networks must be reconciled with the need for client and business confidentiality.
Solutions in this space are already being worked on through need-to-know private networks such as Corda and
zero-knowledge proof networks such as Fireblocks. These can provide secure methods to validate information to
complete transactions while keeping data private.
DLT platforms by their nature create transparency for those with access to the network. The potential negative
consequences may be seen in asset classes such as corporate bonds, where banks are accustomed to privacy in
relation to inventories and some trading activities. However, these can be overcome through privacy characteristics
that can be encoded into platforms. On the other hand, enhanced transparency is a benefit to regulators, and
may be a spur to regulation that supports DLT adoption. Ideally, all parties would maintain privacy in relation to
each other, while regulators could have access to all data on distributed ledgers.
One significant potential issue for DLT platforms is inadequate liquidity. There needs to be sufficient liquidity to
encourage both issuers and investors to participate. For this to happen, the market needs a minimum viable
ecosystem, with an active issuer and investor base. While corporate native issuance is expected to grow steadily
over time, and potentially exceed traditional issuance in select asset classes, a base level of issuance and liquidity
is required in the early stages of adoption to ensure platforms are utilized.
Finally, there has been significant publicity around the energy consumption of proof of work- based public
blockchains such as Bitcoin, where significant amounts of computation is used to register transactions. However,
these concerns are not relevant to DLT platforms in capital markets, which use more efficient validation
mechanisms such as proof of stake and proof of authority. These can be significantly more energy efficient.

The Future of Distributed Ledger Technology in Capital Markets 15

 A future unlimited
DLT offers capital markets a potential step-change in innovation and efficiency. Through the securities lifecycle,
there are opportunities to streamline processes, unlock liquidity, and boost transparency and innovation. Indeed,
the technology is already adding value in many activities, and over time will displace some entirely.
The innovation and efficiency benefits that are driving DLT adoption are well understood. Indeed, we are now on
a path to scale up DLT based solutions. Amid increasing levels of investment and collaboration, we expect to see
more DLT platforms that facilitate issuance, trading, settlement, and custody of natively-issued assets at scale.
(See Exhibit 9). Within the next five years, natively-issued securities could account for a meaningful share of the
market, with participants embracing product opportunities enabled by DLT that can unlock new revenue streams
and value propositions. In the post-trade space, T+0 settlement will become a reality, and platforms will connect
directly to on-chain and off-chain custodians.
Looking further ahead, the pace of innovation will accelerate, with DLT potentially facilitating the majority of
issuance in select asset classes. As market participants prepare for this evolution, they should consider a number
of questions: How will DLT platforms impact capital markets as a whole, and what are the implications for the
value chains and asset classes most relevant to them? How will business models need to change, and what can
be done now to lay the groundwork?
An important consideration is how collaboration can be enhanced, creating the network effects that will drive
transparency, efficiency, and innovation. There are a broad range of potential collaborative approaches, including
supporting the development of end-to-end platforms for specific asset classes, testing applications in discrete
segments of the value chain, joining foundations to develop standards, and engaging with regulators to shape
future laws and frameworks. Through these kinds of initiatives, market participants can ensure they have a seat
at the table, and are ready to capitalize on opportunities as DLT continues its transition from the fringes to the
mainstream. To engage effectively, market participants will also need to make adjustments to their operational
capabilities. These will include more standardized data, workflows, and common protocols through the securities
lifecycle. Based on these foundations, DLT is set to play a key role in building capital markets of the future.

16 The Future of Distributed Ledger Technology in Capital Markets

Exhibit 9: Evolution of the use of DLT in the value chain

Value chain Today Medium Term Long Term

• FIs provide structuring advice • Significant growth in natively • Native issuance overtakes
offline to clients issued securities traditional issuance in select
asset classes
• Syndication and book build • Native issuance via DLT
performed off-chain platforms enables faster time • Growing adoption of
to market and lower issuance fractionalization for issuance,
• Select examples of native costs driven by DLT maturity
ISSUANCE
issuance to date
• Select DLT platforms enable • Issuance of customized and new
fractionalization of issuance products enabled by DLT

• Trading of traditional assets via • Trading of natively issued assets • Wide utilization of interoperable
exchanges, liquidity networks grows on select DLT platforms DLT platforms to trade natively
and MDPs issued assets
• Majority of trading liquidity
• De minimis trading of natively remains non-DLT enabled • Majority of trading liquidity in
issued assets other than select asset classes is conducted
cryptocurrencies • DLT platforms are connected to via DLT
SECONDARY some banking infrastructure
• Platforms connected to all
TRADING • Extended trading hours enabled supporting infrastructure of
by DLT platforms market participants

• Settlement in most cases • Trades conducted via DLT • Trades conducted via DLT
performed off-chain platforms settle T+0 for most platforms settle T+0 for all
on T+1 – T+3 assets assets

• DVP on-chain enabled in select • DVP enabled by CBDCs from • DVP enabled by CBDCs from all
instances select countries and stable coins major economies

• Digital wallets securely • Select DLT platforms connected • All DLT platforms connected
store digital assets but to on-chain and off-chain to on-chain and off- chain
POST TRADE
limited adoption beyond custodians custodians
cryptocurrencies
• Growth in on-chain asset • On-chain asset servicing for all
• Select cases of on-chain asset servicing asset classes enabled via smart
servicing contracts

DLT PENETRATION ACROSS THE VALUE CHAIN

The Future of Distributed Ledger Technology in Capital Markets 17

 Sources
Bank for International Settlements, May 2022, ‘Gaining momentum – Results of the 2021 BIS survey on central
bank digital currencies’

Banque de France, December 2021, ‘The Banque de France has successfully completed the first tranche of its
experimentation programme in Central Bank Digital Currency’

BBVA, November 2018, ‘BBVA signs world-first blockchain-based syndicated loan arrangement with Red
Eléctrica Corporación’

BBVA, July 2022, ‘BBVA, BME and IDB issue first regulated bond in Spain registered with Blockchain’

Digital Asset, November 2021, ‘Goldman Sachs taps Digital Asset to build open platform for tokenized assets’

Enterprise Ethereum Alliance, June 2020, ‘EEA Why Standards’

Ethereum foundation blog, May 2021, ‘Ethereum’s energy usage will soon decrease by ~99.95%’

EIB, April 2021, ‘EIB issues its first ever digital bond on a public blockchain’

Hyperledger, October 2018, ‘Growing the Enterprise Blockchain Ecosystem through open standards and open
source code’

International Capital Markets Association, August 2020, ‘https://www.icmagroup.org/market-practice-and-

regulatory-policy/secondary-markets/bond-market-size/’

Santander, September 2019, ‘Santander launches the first end-to-end blockchain bond’

SGX Group, September 2021, ‘Marketnode, an SGX and Temasek digital asset venture, announces partners ahead
of key product launches’

SGX Group, September 2020, ‘SGX, in collaboration with HSBC and Temasek, completes pilot digital bond for
Olam International’

SIX, November 2021, ‘SIX launches its SIX Digital Exchange by successfully issuing the World’s First Digital Bond
in a fully regulated environment’

Societe Generale, May 2020, ‘Societe Generale performs the first financial transaction settled with a Central Bank
Digital Currency’

Versana, March 2022, ‘Versana, founded by top global banks, launches to transform the $5T Syndicated
Loan market’

Vonovia, January 2021, ‘Vonovia issues first fully digital note via online marketplace firstwire’

World Economic Forum, May 2021, ‘Digital Assets, Distributed Ledger Technology and the Future of
Capital Markets’

18 The Future of Distributed Ledger Technology in Capital Markets

Glossary
Carbon offsets – a carbon offset is an instrument that represents the reduction or avoidance of emissions of
carbon dioxide or other green house gases

CBDC – a central bank digital currency is the digital form of a country’s fiat currency

CCP – a central counterparty clearing house is a financial institution that takes on counterparty credit risk between
parties to a transaction and provides clearing and settlement services

CSD – a central securities depository is a financial organization that holds securities, either in certificated or
uncertificated form, allowing ownership to be easily transferred through a book entry rather than by a transfer
of physical certificates

Digital Assets – assets that only exist in digital form and are created and stored digitally in a distributed ledger

Fractionalization – splitting up ownership of assets to enable increased investor access

MDP – multi-dealer platforms enable trade matching between counterparties, offering pricing from a selection
of market participants

Native issuance – the issuance of digital assets via DLT

OTC – Over-the-counter trading is done directly between two parties, without the involvement of a formal
exchange

Proof of authority – a variant of the Proof of Stake consensus mechanism where instead of tokens, network
participants stake their identity and reputation

Proof of stake – Proof of stake is a type of consensus mechanism for processing transactions used by blockchains
to achieve distributed consensus

Stablecoins – a stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or
gold

Sustainability-linked securities – a type of instrument in which the financial and / or structural characteristics
can vary depending on whether the issuer achieves predefined sustainability objectives

Tokenization – the process of converting any rights or assets into a digital token that can then be used, owned
and transferred by the holder through DLT

USDT – the code for the asset-backed stablecoin Tether

Zero knowledge proof – a verification method whereby one party can prove the truth of specific information to
another party without disclosing any additional information

The Future of Distributed Ledger Technology in Capital Markets 19

 Authors
Sukand Ramachandran Scott Lucas
Managing Director and Senior Partner Head of Markets DLT,
Boston Consulting Group J.P. Morgan
[email protected] [email protected]

Steven Kok Alessandro Ananias

Associate Director,
Head of EMEA Corporate & Investment Bank Strategy,
Boston Consulting Group
J.P. Morgan
Technology and Digital Transformation
[email protected]
[email protected]

Michael Jenner
Corporate & Investment Bank Strategy,
J.P. Morgan
[email protected]

20 The Future of Distributed Ledger Technology in Capital Markets

Copyright ©2022, BCG and JPMorgan Chase & Co. All Rights Reserved.

This document has been prepared in good faith on the basis of information available at the date of publication without any independent verification.
Neither BCG nor J.P. Morgan guarantees or makes any representation or warranty as to the accuracy, reliability, completeness, or currency of the
information in this document nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the
content of this document. It is unreasonable for any party to rely on this document for any purpose and neither BCG nor J.P. Morgan will be liable for
any loss, damage, cost, or expense incurred or arising by reason of any person using or relying on information in this document. This document has
been provided solely for information purposes and does not constitute a recommendation, advice or an offer or solicitation to buy or sell any securities
or financial instruments or of any product or service. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. Further, this Report shall not be considered advice on the merits of acquiring or disposing
of any particular investment or as an invitation or inducement to engage in any investment activity or other product or service. To the fullest extent
permitted by law, neither BCG nor J.P. Morgan shall have any liability whatsoever to any party, and any person using this document hereby waives any
rights and claims it may have at any time against BCG or J.P. Morgan with regard to the document. Receipt and review of this document shall be deemed
agreement with and consideration for the foregoing.

This document does not purport to represent the views of the companies mentioned in the document. Reference herein to any specific commercial
product, process, or service by trade name, trademark, manufacturer, or otherwise, does not necessarily constitute or imply its endorsement,
recommendation, or favoring by BCG or J.P. Morgan.

The Future of Distributed Ledger Technology in Capital Markets 21