The Liquidity Myth: Why “Everything On-Chain” Doesn’t Work for Wholesale Settlement

In the current wave of digital-asset innovation, one idea appears again and again: if we want faster settlement and lower costs, we should put all assets on-chain, and everything else will follow. This works in crypto-native markets, where a single ledger can act as the asset register, the transfer mechanism, and the ownership record. But it does not work for institutional finance, where some things have always existed off-chain and for good reason.

Wholesale markets exist to protect high-value assets for large institutions under strict legal, operational, and regulatory constraints. Assets here are not just data objects; they sit inside legal frameworks that define owners’ rights, obligations, and enforceability, and transfers often depend on legal, identity and compliance checks. When something goes wrong, institutions need operational tools for error handling, dispute resolution, and recovery.

These are not legacy inconveniences; they are the safety rails that have allowed wholesale markets to grow and function at scale. So, the right question as digital assets proliferate and become more mainstream is not, “How do we remove all the intermediaries that add cost?” but, “Where does Distributed Ledger Technology (DLT) genuinely reduce cost and risk, without weakening the institutional foundations that make the system workable?”

The Liquidity Drag

Wholesale markets rely on precision, sound market structure, robust settlement design, strong governance, effective co-ordination, and scalability. 

The persistent weakness of today’s market structure is not that institutional intermediaries exist as middlemen in wholesale transactions, but that the record of ownership and settlement state is fragmented across multiple proprietary systems. When a transaction touches multiple venues and multiple balance sheets, each organisation has to maintain its own version of the truth. Those versions then have to be reconciled, exceptions handled, and the process subsequently incurs delays, opacity, operational fragility and hidden liquidity costs.

This fragmentation also shows up as a balance-sheet and liquidity problem. When cash or cash-like representations are split across multiple settlement venues, firms have to carry buffers. The result: trapped cash and timing mismatches, duplicative prefunding across platforms, and multiple credit lines with conservative intraday limits. In other words, a liquidity drag. If we want genuine efficiency, the target is not one chain for all, but a reduction in fragmentation and in-flight uncertainty—especially around the settlement state.

A More Credible Model

A useful way to think about the ideal institutional model is as a two-layer architecture: an asset layer, where the asset remains anchored in regulated infrastructure that provides legal certainty and protections, and a record / settlement layer, where DLT can record transfers and make them more synchronised, transparent, and programmable. For this to scale properly, each asset should have its own definitive system of record. Cash should have a system of record designed for cash; and securities should have a system of record designed for securities.

The objective is not to re-record cash inside a securities ledger, or to re-record securities inside a cash ledger. It is to co-ordinate state changes across systems of record so that settlement is safe, observable, and efficient. The key to this is conditional settlement; structuring the transaction so that each system updates its state only when agreed conditions are satisfied. This creates shared assurance without requiring a universal ledger.

In many digital asset scenarios, interoperability between these systems of record is implemented as a bridge: an additional mechanism or operator that takes custody of an asset, creates a wrapped representation of it, or otherwise moves value between domains.

These bridges can be useful, but they also introduce a new risk surface: an additional point where value can be trapped, misrouted, or compromised, and where failures may require discretionary intervention.  This risk was evident in the Ronin Bridge hack in 2022, which resulted in the theft of more than $600 million of assets. While the ecosystem continues to evolve and address these risks, they highlight the importance of robust design choices in institutional contexts.

Conditional settlement is different. It does not rely on an intermediary to shuttle assets between systems of record. It aims to co-ordinate state changes across authoritative ledgers under explicit conditions and rules. For Delivery-versus-Payment (DvP) transactions, the cash leg and the securities leg are each finalised on their own authoritative systems of record, but each leg is conditional on the other leg reaching (or being verifiably on track to reach) the corresponding settlement state.

With the proper workflows in place, conditional settlement reduces principal risk without requiring a single universal ledger, duplicated asset records across platforms, or a discretionary bridging operator. The core point is governance and accountability: explicit conditions, enforceable rulebooks, and auditable evidence that conditions were met.

Permissioned is Also Shared

Another common trap in digital asset debates is to treat the “shared ledger” as synonymous with public or permissionless blockchains. For wholesale markets, this may not fully reflect the operational and regulatory requirements involved.

What institutions need is not a universal public ledger, but shared assurances across authoritative systems of record, shared auditability of the relevant settlement state, accountable operators, and clear rulebooks. This is precisely why permissioned infrastructure can be a strength rather than a compromise: in regulated markets, the hard problem is not producing data, but producing data that is operationally governed, legally meaningful, and reliable under stress.

Fnality is best understood through this lens. It provides an on-chain system of record for wholesale settlement in central bank money on chain, anchored in regulated infrastructure that is built for institutional use. As a systemically important payment system in the U.K. recognised by HM Treasury, with other currencies in development, Fnality sits closer to established wholesale payment systems while incorporating innovations from digital asset technologies. Its innovation lies in applying DLT at the settlement layer using funds held in a central bank account, preserving the legal certainty and risk characteristics associated with central bank money, while enabling a more synchronised, efficient, and programmable settlement process.

Systems like Fnality do not require that money be re-recorded on every asset platform. They reduce reconciliation and exception handling, while reducing liquidity drag by allowing firms to consolidate and manage settlement liquidity more effectively, rather than pre-funding multiple disconnected cash venues.

And they prove that, in future, wholesale digital finance need not be a choice between “legacy infrastructure” and “put everything on-chain”. It requires a thoughtful combination of approaches: a system of record built for each asset; DLT only where it adds the most value (the record and settlement layer), and conditional settlement. This is how we preserve the protections wholesale markets have enjoyed for decades, while capturing the efficiencies that digital infrastructure can inevitability deliver at scale

These ideas are explored further in companion articles for Warwick University, as part of the WBS Gillmore Centre for Research, which argues that the future of wholesale settlement will be defined not by where assets sit, but by how systems co-ordinate.