Maturity analysis of the DLT-based capital market

In 2015, the European Union took an important step towards a common, globally competitive single capital market with the decision to introduce the Capital Markets Union. The aim is to strengthen the European financial market, better integrate capital markets and create new opportunities for investors. This requires a comprehensive digital transformation of the capital market, in which distributed ledger technology (DLT), in particular blockchain and the tokenisation of securities, should play a key role. DLT is not only an important lever for remaining competitive in times of technological and demographic change, but also helps to increase efficiency and optimise processes.

Ensuring a regulatory and civil law framework is crucial for the use of new technologies in the capital market. The DLT Pilot Regime at EU level and the Electronic Securities Act (eWpG) in Germany have created a clear legal framework to enable the issuance, trading and settlement of financial instruments using DLT in practice.

The forthcoming Capital Requirements Regulation III (CRR III) and the Basel Committee's SCO60 standard may affect the capital requirements for crypto-assets, depending on how they are structured. These regulations aim to address the unique risks of digital securities and ensure their integration into the financial system.

KfW is one of the world's largest issuers on the international capital markets. As part of digitalisation initiatives along the securities issuing process, the bank has issued two blockchain-based bonds. The motivation behind this initiative was based on three key aspects:

1. to practically test the new legal/regulatory framework and technically implement the issuance of a crypto security in accordance with the eWpG,
2. to gather the broadest possible feedback from market participants with a focus on investors "from the outset", and
3. internal education and external sharing of the knowledge gained.

The whitepaper "DLT-based capital market", which KPMG prepared in cooperation with KfW, presents the key findings and insights gained from the blockchain-based issue of the two electronically and digitally issued bonds. The analysis shows the maturity of the DLT-based capital market and the potential impact of the technology on future financial instruments. It also describes areas for action and solutions that are necessary to further promote the institutional acceptance and integration of this technology.

The issuance of KfW's two blockchain-based digital bonds represents a significant milestone. The resulting lessons learnt show that the development of a DLT-based capital market in an international context has made significant progress in recent years. KfW has a pioneering role to play here. Further pilot projects by the bank and other financial market players can serve as a blueprint for further institutionalisation in the geopolitical tech race in the future.