The London Stock Exchange Group is planning a new digital market business. They claim that it will be the first major exchange in the world to offer extensive trading on blockchain technology, which powers cryptocurrency.
Murray Roos told the Financial Times, the head of capital market at the LSE Group had been evaluating the potential for a trading platform powered by blockchain for about a year and that it had reached an “inflection point” where the company decided to move forward with the plans. Julia Hoggett is the head of London Stock Exchange (a unit within the group) and she has been asked to lead the project.
Roos said that his exchange “definitely is not building anything around cryptocurrencyassets”, but that it was using the technology that supports popular tokens such as bitcoin to improve efficiency in buying, selling and holding of traditional assets.
“The idea behind digital technology is to create a more efficient, transparent, and cost-effective process. . . “It’s important to regulate it,” Roos added.
He said that LSEG waited until the public blockchain was “good” enough and investors were ready to move forward.
LSEG’s move comes at a time when a number of mainstream financial institutions are touting the benefits of the blockchain, a digital ledger which records and verifies all transactions. The blockchain can streamline cumbersome manual processes that are often used to issue and trade financial assets. This is largely due to the so-called tokenisation process, which involves creating digital representations for stocks and bonds that can be tracked using the technology.
Larry Fink of BlackRock said earlier this year that the tokenisation and asset-based markets would be “the next step in the evolution of markets”.
Roos stated that if the LSEG’s plans are realized, it will be the first global large stock exchange offering an “end-to-end” blockchain powered ecosystem for investors. Other blockchain-powered projects only cover a part of the financial asset lifecycle, not everything, from issuance, trading, reconciliation, and settlement.
Roos said that the digital market venture was not a direct competitor of LSE’s traditional businesses, nor was it an attempt to shore-up its equities business, which had suffered in recent times as IPOs have dried up. Roos stated that “We are very committed to London’s equity markets.” “We want to continue doing what London has done for years and innovate.”
LSEG is looking at a separate legal entity to run the digital market business. It hopes to launch the first market within the year, subjected to regulatory approval. It has already begun discussions with regulators from multiple jurisdictions as well as Treasury and the UK government.
The ultimate goal of the platform is to allow participants to interact with other people from different jurisdictions while adhering to all rules, laws, and regulations. This could be done simultaneously in multiple jurisdictions, something that was not possible in the analog world, Roos explained.
He gave as an example, a transaction that involved a Swiss buyer and Japanese asset with an American seller. This would be “very hard” to accomplish using older technology. However, it could be done easily in a digital age if LSE is able to get the buy-in of multiple regulators.
Roos stated that the digital business would likely focus initially on private markets, as activity in these markets was especially cumbersome and opaque. Once LSEG proves the model in this asset, it will extend it to other assets.
Roos stated that “the technical opportunity to digitise a number of traded asset classes was extremely high.”
Esma, the European Securities Regulator, released data on Thursday showing that only $800mn in traditional assets have been tokenised — or placed on the blockchain.