Post-Trade Served on a Distributed-Ledger and Smart-Contract Platter

Making post-trade processes more efficient and trustworthy

In a report entitled Time for trust: The trillion-dollar reasons to rethink blockchain, payments and financial instruments have been identified — by economists — as one of the top use cases driving the adoption of distributed ledger technology (DLT) and having the potential to yield the most economic value.

Post-trade processing in particular has been challenged by the pandemic, and we are seeing exciting innovation happening to improve efficiency, trust, and inclusion in cross-border, post-trading operations.

Post-Trade Realities

Post-trading involves multiple participants and complex processes. Post-trading refers to all processes taking place once a trade is made, and includes all activities that enable the transfer of ownership of a security from seller to buyer, in return for payment.

The five key activities or functions that are relevant to the transfer of ownership and trading of securities are:

• Clearing — takes care of the validation of trades and the preparation of the settlement process
• Settlement — encompasses the transfer of ownership of securities from seller to buyer, and the transfer of money from buyer to seller
• Custody — comprises customer account keeping and management of securities on behalf of the customer
• Safekeeping — handles the storage of securities (certificates)
• Notary — verifies whether a specific security is eligible for post-trade services

In a post-trading scenario — embracing all these functions and involving multiple participants — trust and efficiency may be brought into question. Do we know and trust the ecosystem participants? Where does the data come from? How is the data verified and reconciled? Are the transactions transparent? What is the extent of reliance on legacy systems and how much manual intervention is involved?

Moreover, with the coexistence of traditional and digital assets, the ever-growing demand for cross-border investments, as well as the remote access to trade being increasingly common, the efficiency, safety and transparency of post-trade operations have come under scrutiny.

Although the post-trade industry has made inroads into moving away from legacy systems and digitally transforming operations, the pandemic has highlighted multiple frictions caused by increased market volatility and remote working environments.

Post-Trade Innovation Backed by Distributed Ledger Technology

LiquidShare, a fintech startup founded in 2017 by eight major European financial institutions, seeks to address these frictions by building a European post-trading blockchain platform that streamlines back-office operations, while enhancing the transparency and trustworthiness of post-trade processes.

LiquidShare’s platform is underpinned by Sextant for Daml, a solution that delivers enterprise-class distributed ledger and smart contract infrastructure. Sextant for Daml radically simplifies the deployment and management of the Daml runtime environment on distributed ledgers, in this case, the open-source Hyperledger Besu, which was LiquidShare’s ledger of choice. Sextant for Daml has allowed LiquidShare to focus on their blockchain application and customer needs, rather than the underlying technology infrastructure.

Hyperledger Besu is a distributed ledger protocol that combines both permissioned and permissionless features — its permissioning schemes were designed to be used in consortium environments. A Hyperledger Besu-based implementation enables participants in a business network to share information and collaborate in a trustworthy manner, without a central authority, and with none of the individual parties having the ability to one-sidedly enforce decisions, either accidentally or in bad faith. It ensures that each participant has an immutable and verifiable, golden copy of the truth.

Smart contracts have become known to the world as transaction protocols running on a distributed ledger, embodying the self-enforcing business logic of a multiparty application or business process. Daml, created by Digital Asset, is an open-source, smart-contract programming language and application development framework, purpose-built for coding complex multiparty business processes, and designed to work with different distributed ledgers as well as centralized alternatives. Daml has enabled LiquidShare to embed rules and business logic, and build multiparty business processes easily and rapidly.

Outcomes

LiquidShare is addressing challenges the post-trade industry is facing, and is looking to arm the post-trade ecosystem participants with tools — leveraging distributed ledgers and smart contracts — to make transactions more efficient, transparent and trustworthy.