By Huw Jones
LONDON (Reuters) - Blockchain needs its own music industry 'MP3' moment as fragmented regulation and technology hamper the development of a digital securities industry that could help realise its full potential, industry officials said.
Blockchain, or distributed ledger technology (DLT), underpins cryptoassets like bitcoin and allows many parties to access a single version of data at the same time.
But extending its application to issuing, trading and settling securities like stocks and bonds requires a common digital format for the securities themselves, said Gerd Hartung, head of new digital markets at Deutsche Boerse.
"The real topic is how do we get to the MP3 digital format you see in the music industry. The next level we are getting to is digitisation of the financial instrument itself," he said.
The digital MP3 file format, with its inferior audio quality, did not look like a disruptive technology until the arrival of MP3 players and streaming systems dramatically altered the music industry, removing a slew of middle men and almost all the barriers to entry faced by an artist.
A similar pivot in financial markets would allow an instrument to be issued in hours rather than days or weeks, better targeting specific markets and taking advantage of windows of calm to reach more investors faster and free of data errors, industry officials say.
But it would also challenge banks' dominant position in the revenue chain for issuing and trading securities.
A further step from pilot project to live markets came this week with the launch of LedgerEdge, described as the first regulated, DLT-based corporate bond platform.
"Everyone is looking for greater clarity on the regulatory definition of digital assets," said David Nicol, chief executive and co-founder of LedgerEdge.
But with many elements yet to fall into place, Arjun Jayaram, founder and chief executive of blockchain company Baton Systems, warned there was unlikely to be a "big bang" moment.
Banks still use "very old" technology, making it harder to interface with DLT platforms, he said, while Javier Hernani, head of securities services at SIX which runs the Zurich and Madrid stock exchanges, said hooking up to blockchain was a cost that needed to be phased in.
Hernani also pointed to the need for digital versions of currencies such as the dollar, euro or sterling to speed up payment and achieve the full benefits of DLT, something the relevant central banks have yet to decide on, let alone launch.
Instead a "bridge" would be needed to allow digitised assets to be traded, but paid for in fiat currencies, he suggested.