Have the events of the past 12 months accelerated the market's digital journey? Jennifer Peve, DTCC Managing Director of Business Innovation, and Rob Palatnick, DTCC Managing Director, Global Head of Technology Research and Innovation, and Chairman of the Hyperledger board, spoke at the Blockchain Expo about trading in the new digital asset world.
The Market's Digital Asset Journey
When looking at how the pandemic accelerated the digitization of the financial markets, Peve stated, "with crisis comes opportunity." However, the industry has been on a digital transformation journey for many years, beginning with the improvement of front-office functions, such as moving from floor trading to electronic trading. These shifts led to emerging fintech providers solving post-trade efficiency challenges and evolved to improved business models that allowed the streamlined processing of electronic data.
While a great deal has been achieved, the increased volatility and market volume of 2020 further stressed the importance of digitization and the need to accelerate the industry's modernization strategy. In September 2020, DTCC published a white paper, From Physical to Digital: Advancing the Dematerialization of U.S. Securities, proposing the complete dematerialization of physical securities in the US, to reduce risks, costs and human touch points, as well as increase efficiency and resiliency across the industry.
Enterprise Ready or Evolutionary?
Should financial services firms take small incremental steps or giant leaps in their digital transformation journey? When working with new technologies, Palatnick noted each firm has its own trajectory.
"We have validated newer technologies, such as cloud and automation workflow, that can meet our industry non-functional requirements including performance, scale, resiliency and redundancy," said Palatnick. These technologies provide business capabilities that can help meet compliance, risk management and reporting requirements and provide a cleaner client experience. Other emerging capabilities in technology include machine learning, optical character recognition, and natural language processing, which can transform a large document that describes an asset into a digital representation and potentially turning it into a digital token of that asset.
As far as the bigger bets on an emerging technology, like DLT, Palatnick stated, "DLT is still evolving—we continue to look at business ideas and evaluate models and stacks to support these opportunities." It can take decades to build confidence in the resiliency and reliability of new technologies, such as distributed ledger technology. While DTCC is a leader in the ecosystem and has created open-source code and is advancing projects and ideas from proof of concept to production, DLT is still in its early phase.
Digital Assets and Tokenization
The benefits of digital assets and tokenization are not just evolutionary—they present a fundamental improvement in an asset's life cycle. The ability to provide proactive versus reactive compliance, or for an asset to retain key characteristics for its life cycle, will be a great efficiency for end-to-end processing and to reduce friction and costs. "DLT infrastructure and digitization of assets can ultimately result in a much more integrated and synchronized peer-to-peer network...a fundamental improvement in how we do business," said Peve.
Examples of this include Project Whitney, which explores the value in creating a modern digital infrastructure to support private market assets throughout their lifecycle. DTCC engaged with stakeholders to design a platform and ecosystem that enables stakeholders to benefit from network effects. Another example is Project Ion, which focuses on the benefits of technology in an accelerated settlement use case and looks at how stakeholders could adopt these newer technologies.
"Project Whitney allows DTCC to find new ways of working, while Project Ion is an opportunity to evolve how the industry works," Peve commented.
Palatnick stated that the technology to transform brings both promise and challenges. As technology continues to be created, the need for standards and interoperability is critical. "We can create a future where firms can easily adopt a node, have a single point of truth and know every aspect during an asset's life cycle. This is an enormous journey that should be done one step at a time."
Critical to the future success of digitization and tokenization is the role of an independent network governor to implement standardization and interoperability. This role will add value to help ecosystems grow and enforce governance over enhancements, smart contract updates and how participants act on a blockchain network. Peve concluded, "this presents a shift from what intermediaries do today and is an interesting opportunity for new business models that can emerge.”