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Citi survey shows 74% of financial institutions are engaging with distributed ledger technology

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(Kitco News) - While governments and financial institutions around the world grapple with the proper way to deal with the evolving cryptocurrency market, there appears to be agreement on the fact that distributed ledger technology (DLT) has many benefits to offer society and will be integrated into the global financial system in the years ahead.

According to a new report from Citi entitled “Securities Services Evolution 2023: Disruption and transformation in financial market infrastructures,” a survey of leaders in the financial world found that 74% of respondents said they are engaging with DLT and digital asset initiatives in 2023, up from 47% in 2022.

Citi said this is “a clear sign that DLT momentum continues to grow despite negative news headlines around FTX and other initiatives,” and noted that, “building and preparation activity seems increasingly focused on DLT and tokenization as the industry looks to leverage the choice and flexibility that the technology offers in operating processes and market rules.”

One of the report's main points of focus was settlement cycles within the current financial system. The survey found that 89% of respondents expect their local settlement cycles to shorten to T+0 or T+1 within the next five years, and DLT and central bank digital currencies (CBDCs) are likely to play a major role in achieving that goal.

Global economies transitioning to faster settlement times. Source: Citi

“As firms across the world are discovering with their preparations to T+1 settlement cycles in the US and Canada next year, the impacts of accelerated settlement are profound and touch everything from trade fails to headcounts and treasury requirements,” the report said. “In need of a currency leg for digitized transactions, the industry is increasingly bullish on their expectations of digital cash being operational within five years (through a range of CBDCs and more commercial mechanisms).”

Of the 483 survey respondents and 12 financial markets infrastructures (FMIs) surveyed, 87% said they see CBDCs as a viable option for shorter settlement cycles by 2026, up from 72% the previous year. 52% of market participants expect CBDCs to be live within three years and said they will provide “a robust and scalable solution to the long-running question of how to store and transfer value on blockchains.”

Respondents also highlighted artificial intelligence and machine learning as technologies vital to ensuring a smooth transition to T+1/T+0.

Citi noted that the past year has seen a shift “in the parallel evolutions of digital assets (including crypto-currencies) and DLT-based projects (including tokenization).”

“Until late 2022, crypto-driven development led the development agenda as firms rushed to provide trading, financing, custody and asset servicing around crypto,” the report said. “As a result of these pressures, 38% of respondents are today live with crypto offerings – well ahead of the 22% using DLT offerings in a live environment.”

The report acknowledged that the events of 2022 have resulted in a “divided” crypto landscape that is slowing in momentum versus broader DLT-based initiatives.

“With speeds and directions of development varying by region, the net effect appears to be a slowing in the global momentum around digital assets, with only 32% of firms now in [the] build-out phase (predominantly in Europe), compared with 44% of respondents working on DLT and tokens,” the report said.

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Asset classes and activities that are showing promise for large-scale deployments include bond issuance, securities finance – including lending, repos, and collateral – mutual fund distribution, and private equity.

“In each of these areas, the operational benefits of real-time data synchrony, complex data models and smart contracts are material – transforming highly manual, highly networked ecosystems into coherent data ecosystems,” the report said.

The survey also found that 87% of custodians are actively working on DLT and digital asset projects currently, but only 25% of their end clients are similarly active, “which begs the question why three-quarters of institutional investors are still not engaging,” Citi said.

Engagement with digital assets/DLT by segment. Source: Citi

When it comes to the barriers that will prevent the widespread use of digital assets over the next three years, regulatory uncertainty was cited by 51% of respondents, followed by limitations of knowledge in key functions such as risk, compliance, and legal matters, which was cited by 43% of respondents.

Top impediments to the widespread use of digital assets in the next three years. Source: Citi

“Looking ahead, the continued momentum of DLT and digital assets looks set to depend on two factors,” Citi said. “First is the sell-side’s ability to successfully engage the buy-side, using a narrative built around the needs of a portfolio manager (more than an operations head today). Second is the ability to change industry processes to realize the benefits that DLT offers.”

The report closed by noting that the next five years will see a “massive amount” of change in the financial industry. Settlement cycles will continue to shorten in more markets, DLT will be implemented in live transactions, and core banking systems across the industry will be removed and replaced.

“In an era of increasing competition for investment and resourcing, firms will face significant challenges and trade-offs in the year ahead as they look to accommodate and balance their solutions to these changes,” the report said. “What is different today is that those trade-offs look set to be managed as an ecosystem discussion.”

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