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China’s Regulations Require Amendment To Allow Use Of DLT In Stock Market

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China’s Regulations Require Amendment To Allow Use Of DLT In Stock Market

Shanghai Stock Exchange (SSE), which is deemed one of the largest securities trading platform by market cap globally, is considering the use of distributed ledger technology (DLT) in its stock market. The not-for-profit organization under the direct administration of the China Securities Regulatory Commission had a market capitalization of $5.12 trillion at the end of 2018.

Uses of Distributed Ledger Technology

The research paper published by SSE earlier this week examined the uses to which DLT can put at diverse stages of a security transaction, including the pre-trading customer registration, issuance of securities, trading of securities and settlement after trading.

The research paper also highlighted the core benefits of adopting the distributed ledger technology in China’s financial ecosystem. One notable benefit listed is the increment in the settlement efficiency by changing  the existing T+1 model under which a typical transaction settlement takes place one working day after the execution of the order.

While making reference to the current works being done in other financial markets including Australia and Hong Kong, the SSE also highlighted in its report two potential sectors where DLT may offer additional benefits to China’s financial sector. The report established that the general global consensus is that DLT would bring about revolutionary changes in the financial ecosystem. It was further stated that its initial uses  would be for over-the-counter issuance of securities and trading of securities, and also for making settlements after trading.

Uses of DLT subject to Regulatory Obstacles

It was stated in the paper that the potential uses of DLT in the Chinese bourse could still be subject to several regulatory obstacles because it is based on  processes and operations different from what currently operates in the stock exchange’s registration and settlement sectors. Currently, the SSE makes use of third-party institutions that act as custodians and also post-trading transactions settlement and this system could be disrupted by the DLT. Thus the paper posited that for DLT to be used, the market needs a new legal framework put in place by the central government and the relevant regulators.

In conclusion, the paper suggested that such  regulations should take into consideration the changing technology, and regulators should also approach DLT as a crucial area to be studied as they proceed in the development of a strong regulatory framework that allows financial innovations to thrive.