The London Stock Exchange Group (LSEG) wants to launch a new trading venue that uses blockchain, but the exchange operator insists it has no plans to support cryptocurrency trading.
In a world where “crypto” and “blockchain” are often used interchangeably, it appears odd that the multi-trillion dollar stock exchange is so adamant it won’t list cryptocurrencies on the new platform
As reported by the Financial Times on Monday, September 4, LSEG has been weighing up the possibility of launching an on-chain stock exchange for around a year and has now decided to take the plans forward.
The company hopes to have its first blockchain-based market up and running by next year and is already in talks with the U.K. government and regulators in multiple jurisdictions to secure the necessary permissions.
According to the report, Murray Roos, the Group Head of Capital Markets at LSEG, said the firm had waited until it was sure blockchain technology was “good enough” and investors were ready.
As things stand, few technical details have been shared about the planned exchange and there has been no indication as to which blockchain it would deploy. However, Roos did reveal that it would be an “end-to-end” system, recording the full lifecycle of financial assets on-chain, from issuance to trading, reconciliation and settlement.
Although blockchain technology is most commonly associated with cryptocurrencies, Roos stressed that LSEG is “definitely not building anything around crypto assets.” Rather, the anticipated platform will deploy blockchain technology to improve the efficiency of buying and selling traditional assets.
“The idea is to use digital technology to make a process that is slicker, smoother, cheaper and more transparent […] and to have it regulated,” Roos added.
While LSEG is set to become the first operator of a major global stock exchange to embrace blockchain, the field of asset tokenization is hardly new.
Around the world, banks, asset managers and FinTechs are increasingly turning to blockchain as an efficient and secure means of issuing and recording the ownership of digital securities.
But, like LSEG, they have often been at pains to distinguish between crypto assets and tokenized traditional assets.
To understand why, consider the way financial regulators have responded to exchange-traded products linked to cryptocurrencies.
In the U.S., the Securities and Exchange Commission (SEC) has allowed a small number of ETFs to deal in crypto futures. But as far as directly holding cryptocurrency goes, the SEC has so far resisted attempts to register a Bitcoin spot ETF. Although that may change soon.
In the U.K., where LSEG is bound by the rules of the Financial Conduct Authority (FCA), the regulator has taken an even harder line. To date, the FCA has prohibited the creation of any funds that are exposed to crypto, whether they deal directly with digital assets or do so via derivatives.
Moreover, the U.K.’s regulatory approach is typically suspicious of anything that could risk contagion between crypto and traditional financial markets.
For instance, in 2022, the Bank of England published an extensive review of the risks crypto markets posed to the stability of the financial system.
The report found that, to date, regulated financial markets have been largely sheltered from volatile crypto prices. However, it cautioned that as crypto assets become increasingly embedded in institutional investors’ portfolios, the potential for cross-contamination will grow.
For LSEG, although the firm isn’t barred from launching a crypto exchange per se, the stance taken by U.K. regulators would make such a move difficult.
In light of the Bank of England’s financial stability concerns, LSEG’s insistence on distinguishing between crypto assets and tokenized traditional assets could be read as a way of reassuring regulators that it won’t try to introduce crypto-based financial products via the back door.
In fact, in its initial foray into blockchain technology, the London Stock Exchange operator will only focus on private markets. According to the Financial Times, it will only expand the concept to publicly traded assets (such as stocks and shares) once it has proven the technology works.