The London Stock Exchange Group (LSEG) has decided to tap into the potential of distributed ledger technology, claiming that this will make it the first major exchange to offer extensive trading of traditional financial instruments on the blockchain technology best known for powering crypto.
The mainstream media outlet Financial Times report states that the company has been looking into the potential of blockchain-based trading venues for a year. Blockchain technology is primarily linked with cryptocurrencies, but its applications are limitless. According to an executive, the LSE Group has been exploring how blockchain can improve traditional asset trading.
Overview
LSE Group’s Head of Capital Markets, Murray Roos, mentioned that the company’s efforts in looking into the blockchain had reached an inflexion point where they decided to move their plans forward. Roos clarified that the exchange was not building anything around crypto assets but was looking to use the technology that underpins popular tokens such as Bitcoin (BTC) to improve the efficiency of selling, buying and holding traditional assets. Roos said, “The idea to use digital technology to make a process that is slicker, smoother, cheaper and more transparent … and to have it regulated”. He added, “LSEG had waited to proceed until it was sure that the public blockchain technology was good enough and that investors were ready”
Earlier this year, BlackRock Chief Executive Larry Fink emphasised that the next generation for markets lay in the tokenisation of assets. A few months ago, BlackRock applied to create its own ETF tracking BTC spot prices, triggering a wave of subsequent applications and optimism in the charts of digital assets. Roos claimed that if the plan comes to fruition, the LSEG would be the first major global stock exchange to offer investors an end-to-end blockchain-powered ecosystem. Several blockchain-powered projects have covered only part of the lifecycle of financial assets rather than everything from issuance to trading, reconciliation and settlement.
LSE Group’s head added that the digital markets venture would be a competitor to LSE’s traditional business, and its development was not an attempt to shore up its equities markets business, which suffered in recent years as initial public offerings dried up. Roos said, “We’re very committed to the London equity markets. We are seeking to continue to do what London has always done and continue to innovate.”
How Blockchain Could Streamline Exchange Operations
According to the report, LSEG is considering using a separate legal entity for the digital markets business, hoping to have the first market up and running within the next year, subject to regulatory approval. Talks between regulators in multiple jurisdictions, as well as the government and Treasury in the UK, are already underway. Roos noted, “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 analogue world”.
Roos cited an example involving a Swiss buyer, a Japanese asset and an American seller. In the traditional market, a transaction between these parties would be complicated but could be easily accomplished digitally if LSE can get buy-in from multiple regulators. Initially, the digital business would likely focus on private markets, increasing access to the available products and instruments. Once LSEG has proven the model successful, the service will be expanded to other assets. Roos said, “The technical opportunity of digitising a bunch of traded asset classes is extremely high”.
Integration Into Blockchain
For LSEG, this is not their first venture into blockchain and tokenisation. Other traditional financial infrastructures have started warming up to integrating blockchain technology into their business. On August 31st 2023, SWIFT, a bank messaging network, shared a report on how it connects with blockchains to solve the interoperability problem between various blockchain networks.
In 2019, an airline carrier, Lufthansa Airlines, integrated blockchain-based technologies by launching a nonfungible token (NFT) loyalty program on the Polygon network and offering NFT holders the chance to gain rewards like lounge access and flight upgrades. Then, two years earlier, experts from Coininsider announced that the company would use blockchain technology to digitise the distribution of securities for small and medium enterprises (SMEs) in Europe. So far, data from the European securities regulator Esma showed assets worth $800 million of traditional assets had been tokenised in the European market.
The launch of LSEG products would undoubtedly boost its Value. Some traditional industry representatives believe tokenisation is the future of financial markets, and the next revolution awaits them. Even though the United States regulator (SEC) is blocking the acceptance and delaying the final decision, the industry is convinced that crypto ETFs in the US will be released. It is just a matter of time.
