Delays in trade execution and settlement are prevalent in today’s capital markets, leading to inefficiencies that hinder liquidity and increase costs, according to UBS’s latest whitepaper.

The paper, which explores how Distributed Ledger Technology (DLT) can address these persistent challenges and transform global capital markets, states that many existing platforms are outdated and disconnected – leading to redundant and cumbersome processes.

“The idea that settlement processes should take more than a few minutes feels completely foreign in this day and age. It is therefore highly encouraging to see traditional financial institutions embracing blockchain technology in this way,” James Butterfill, CoinShares Head of Research, told Traders Magazine.

Cross-border transactions are particularly burdened by expensive and risk-heavy intermediaries, while additional layers of brokers and clearinghouses add cost and slow down transactions.

To combat these challenges, UBS proposes a hybrid model that merges traditional finance (TradFi) with elements of decentralised finance (DeFi).

By leveraging DLT and selectively applying Artificial Intelligence (AI), this new business model could standardize and streamline transaction processes, minimize the role of intermediaries, and speed up settlement times.

Moreover, Digital Capital Markets would involve the tokenization of financial instruments, automation of settlements through smart contracts, and where suitable, the shortening of settlement cycles to nearly instantaneous ‘atomic’ settlements, according to UBS.

“UBS, in particular, has been moving in this direction for some time, having published Building the Trust Engine in 2016. However, with several competing incumbent technologies already in play, UBS may face challenges,” Butterfill said.

“Nonetheless, its well-established traditional finance infrastructure could give it an advantage where others have struggled with its hybrid model approach,” he added.

The bank also advocates moving toward near-instantaneous ‘atomic’ settlements.

This is a key component of this approach is digital capital markets, where financial instruments are tokenised, settlements are automated through smart contracts, and transaction cycles are significantly shortened.

The optimization provided by DLT and AI-based business models offers numerous benefits. Real-time transaction settlement and reduced operational costs are among the primary advantages.

Enhanced transparency and improved systemic resilience are also achievable through these digital business models.

Additionally, digital analytics can significantly assist with risk management and uncover previously hidden commercial opportunities, while AI-driven trade reconciliation can support regulatory compliance.

“This paper offers a clear and insightful analysis of inefficiencies in global capital markets, particularly highlighting the benefits DLT can bring,” said Michele Curtoni, Head of Strategy at SIX Digital Exchange (SDX).

To ensure a smooth transition, UBS recommends a phased implementation of digital capital markets. This structured approach allows for gradual testing and regulatory adaptation while maintaining market stability.

“The use of DLT, alongside other technologies, to enhance settlement speed, improve liquidity management and collateral movements, and reduce costs is an obvious step forward,” he told Traders Magazine.

“Collaboration is essential, and as the industry evolves, regulated infrastructure providers — who already bridge traditional and digital finance — will play a crucial role in shaping the future landscape,” he added.