Could Distributed Ledger Technology be the ”Silver Bullet” for Facilitating Cross-border Investments?
The benefits from having access to truly international capital markets are huge for both institutional and private investors. The ability to invest in just the right security brings benefits such as diversification and ability to follow an agenda-driven investment strategy.
Written by Peter Jørn Jensen, Director | The 7th of March 2022
Over the last 30+ years, markets have indeed been more integrated and it is increasingly possible to get a quote on any investment opportunity in the world.
However, the existing market infrastructure is fragmented and often nationalistic which creates friction. Settling an investment outside the home (or ‘near-home’) market can be unnerving for investors and sometimes costly. Has “money met paper”? What is the status of the transaction? Who holds the investment on my behalf? What custodians are involved – and are they safe?
The US Advantage
Many European investors look with envy to the US. However, the US still has unique advantages to even the EU in form of having a single (or closer to a single) legal foundation together with a single currency and general infrastructure.
Obviously, a lot has been done to facilitate the process. The introduction of T2S helps, but T2S can also function as a closed club with limited access. And it is important to remember, that investors also have a lot of benefits from the existing infrastructure in terms of liquidity in listed markets and asset safety.
Issuers also face challenges – who are the current owners? Information available may not be up to date. This by the way also complicates some KYC processes. Corporate actions are a separate area of concern – who should receive dividends? Whose stocks are split? Who should we extend a take-over offer to?
DLT – Benefits vs Challenges
In many ways, Distributed Ledger Technology (DLT) can appear to offer a solution with many benefits. DLT offers one place for all relevant information. Everybody always knows who owns a given security. Everybody also knows everything that has ever happened, i.e., all relevant corporate actions. In theory, at least.
But the initial list of obvious benefits also points to the challenges. Who should be included? Is it a ‘professionals only’ system or should individual investors have access? Can that work – is there a level that qualify as Too Much Information? Would total transparency deter or facilitate insider trading? How much information is required to qualify as all relevant information (as a sidenote: the European ESG Template for exchange of information on investment funds holds 600+ data points per fund – Read more about Reporting on Sustainable Investments).
Infrastructure & Friction
And then comes the challenges of the full infrastructure – a well-functioning market requires, pricing, market making, clearing, settlement, custody, corporate action management etc. and how do we create a market with the right incentives to provide these and still be a cost-efficient alternative?
The issue of friction may actually also point to a great barrier for all alternatives – for friction equals costs and investors’ costs are important income for the incumbent system.
And while a DLT solution could potentially have prevented the Cum-Ex tax scandal that plagues Denmark, the biggest hurdle might be the tax systems across the international markets.
Disruption is due and, quite a lot of initiatives are currently ongoing and important insights are generated.
We will share our insights as they are generated and will dig into some of the challenges and options in the coming time.
Our name, Capital Market Partners, reflects what we define as our core service: Business understanding based on extensive experience in applying technology in the capital market area.
As a business partner, we offer consulting services based on our combination of business understanding and IT know-how. Our work analyzes, implementation of IT systems and other projects supports strategic decisions at different levels in complex business contexts.
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