The Digitalization of Financial Markets: Challenges and Opportuni

Although digitalization has become a part of the economic system, it has not yet reached its full potential. To make this happen, the financial sector needs a strong foundation built on a blockchain infrastructure that is safe, reliable, and highly scalable and that is backed by pertinent legislative initiatives.

Regulators in many countries are currently working on this issue. For instance, the European Union's regulators are developing uniform legal standards for digital markets. They approved the MiCA cryptocurrency regulation bill in October 2022. The German Electronic Securities Act, the Luxembourg Digital Emissions Law, the EU4Digital initiative, the EU Digital Markets Act, and other laws have already adopted some regulatory framework. 

However, even this is insufficient to move the digitalization of financial markets to a higher technological level. In order for the new system to function, it will be necessary to criticize the current paperwork, put new business models into place that are based on the near future, and ensure the stability of the markets.

“Despite these positive signals from regulators providing guide rails for the market to move more freely towards digitisation, we have seen a relatively slow uptake of the opportunities and potentials among market participants so far. The readiness of the market is key to the progression of digitization, but although most financial institutions have expressed the intention to adopt digital securities, only 10–15% have started actively investing in the segment so far,” writes Jens Hachmeister, Head of Clearstream New Digital Markets at Deutsche Börse Group, in Ledger Insights media.

The expert claims that this is because investing in new technologies is expensive because both the old and the new infrastructures will need certain level of investment for some time after being switched over. Furthermore, there’s no guarantee of success and no immediate return on investment.

This process requires confidence and an innovative mind, as well as the ability to convince skeptics of the need for blockchain technology. It takes courage to evolve the financial industry's digitalization. However, the practical use of digital securities has demonstrated that blockchain and other types of distributed ledgers improve financial transactions.

“Tokenization can enhance securities velocity and liquidity, reduce settlement times, and lower costs during the security’s lifecycle. Firms should consider addressing the most intractable pain points in the industry and within their organizations with targeted DLT capabilities,” says Horacio Barakat, Broadridge's Head of Digital Innovation.

This statement will be supported by representatives of the Swiss banks Credit Suisse, Pictet, and Vontobel, who successfully tested the tokenization of securities in December 2022. JPMorgan, which intends to use blockchain in its processes, will also confirm these words. The assertion will also receive support from the Israeli government, which is testing government bonds on the blockchain.

Based on experience, it is possible to draw the conclusion that digitalization boosts operational effectiveness, increasing market profits. The move to distributed ledgers for financial tasks enhances user experience and increases accessibility and liquidity of banking and exchange services.

However, it is critical that everyone remembers that technology is not an end in itself, but rather a means to solve problems and meet actual user needs.