Distributed Ledger Technology (DLT) is a term used to describe a new way of handling data and transactions. It is a form of database that allows multiple copies of a ledger to be shared between different organisations.
DLTs can provide several benefits, including increased security, improved efficiency and reduced costs. They could include anything from cryptocurrencies like Bitcoin and Ethereum to more traditional applications like supply chain management.
One of the most exciting aspects of DLT is the potential it has to revolutionise finance.
This article explores how DLT is being used to change the financial landscape and looks at how fintechs could use it in the future.
Why Distributed Ledger Technology?
There are many reasons why DLT is seen as a game-changer for finance., and one of the most important is that it has the potential to increase transparency and reduce the risk of fraud.
This advantage is because all transactions made using DLT are recorded on a shared ledger, which can be easily verified and traced.
Other benefits include the fact that DLT is often faster and cheaper than traditional methods, as well as being more secure. Furthermore, it allows machine-to-machine communications, meaning that fintechs can automate financial transactions.
“Make no mistake, Distributed ledger technology (DLT) is already delivering value in the institutional payments space,” said Alex Knight, Head of EMEA, Baton Systems. “We’ve moved on from a world where using DLT is a futuristic state to one where, for example, our DLT powered Core-FX solution is being used in a live production environment every day by two of the world’s largest banks to settle FX transactions.”
He added, “Forward-looking firms are now adopting DLT to address critical post-trade operational, funding and liquidity issues – this is making a real difference to their risk profile and their bottom line. That’s without even taking into consideration the optionality that DLT brings in terms of flexibility, transparency and immutability as banks start to prepare for radically shortened 24/7 settlement cycles and the need to process and settle a growing wave of native digital assets.”
Applications of Distributed Ledger Technology
DLT is already being used in many different ways within the finance sector. One example is in payments, where it is being used to speed up cross-border payments and reduce costs.
Digital assets, including cryptocurrencies, are just one area where DLT has a significant impact. It also applies to other asset types, such as commodities, currencies, securities, properties, and utilities – to name a few. They can be traded, managed and stored using DLT.
In addition, digital assets can be divided into fractions, meaning people can trade them in smaller amounts. This strength could make investing in them more accessible to a broader range of people.
The digital asset landscape is constantly evolving, and new use cases are being found all the time. For instance, DLT is being used to create ‘smart contracts’. These are self-executing contracts that people can use to exchange money, property, shares, or anything of value in a transparent and conflict-free way.
Smart contracts are seen as a major breakthrough because they have the potential to reduce the need for third-party intermediaries, such as lawyers or brokers. They would not only save time and money but could also help to resolve multiple pain points such as fraud.
Decentralised Finance (DeFi)
DeFi is another area where DLT has a significant impact. It is a new way of handling financial transactions that does not rely on centralised institutions like banks. Instead, it uses smart contracts and other blockchain-based technologies to allow users to directly interact with each other to get loans, interest, or investments.
This innovation has the potential to make financial services more accessible and inclusive, as well as give users more control over their data.
Decentralised Exchanges (DEXs)
Another application of DLT in finance is in the form of decentralised exchanges (DEXs). These are online platforms allowing users to trade cryptocurrencies and other digital assets without a centralised authority, meaning they are more secure and efficient than traditional exchanges because every user keeps access to their own wallets.
In the future, DEXs could play a significant role in how people trade various assets, from stocks and shares to more traditional commodities like gold, oil, and even properties.
What’s next for Distributed Ledger Technology?
DLT has the potential to revolutionise the finance sector. Many different use cases are already being explored, and fintechs will likely find many more in the future.
“Put simply, with interoperable distributed ledger technologies, banks can take their existing, often highly opaque processes and start operating with real-time visibility,” added Alex. “They can operate collaboratively with internal or external counterparties using technologies flexible enough to deal with the idiosyncrasies of an individual firm’s systems and processes, and base decisions on a single source of truth. This means manually intensive processes can be completed significantly faster and more efficiently – completely eliminating, for example, the need for continuous and time-consuming payment reconciliations.”
As DLTs develop, they will likely become even more mainstream and adopted by a broader range of sectors beyond finance, including governments. This revolution could lead to a more efficient, secure, and inclusive economy that works for more people.
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