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Evolution in Capital Markets: Digitalization of Assets

By DTCC Connection Staff | 4 minute read | May 5, 2021

During the Digital Monetary Institute Symposium, “Money: Central Banks and Digital Currencies,” Jennifer Peve, DTCC Managing Director, Business Innovation, spoke about the role of digitization and blockchain in financial services and how these emerging technologies are shaping the future of financial institutions. Here’s a recap of her discussion:

Shaping the Industry with Emerging Technologies

“DTCC has been closely evaluating and engaging around blockchain, tokenization, and other emerging technologies for several years,” stated Peve, noting that these technologies have several purposes and can drive efficiency in the capital markets ecosystem. “The ability to maximize value by enabling digital assets around tradable assets has opened up more opportunities.”

The adoption of emerging technologies and new business models can present innovative ways to solve challenges. There are many opportunities to think about bridging legacy and digital assets, and DTCC is exploring how to introduce these new technologies in a meaningful way, while ensuring complete operational confidence. But, as Peve noted, “when looking at changing an existing critical market infrastructure with interconnected pipelines and multiple stakeholders, it is critical that the modernization be as robust and resilient as existing applications.”

Emerging technologies can also be used to improve existing processes or define new ecosystems. Introducing these new technologies to certain use cases and business models, sometimes referred to as “bolt-on opportunities,” can present more efficient workflows that include the distribution of data and synchronization in a streamlined manner.

Project Ion is an example of how DTCC is using new technology to tokenize and re-represent existing assets on the blockchain for accelerated settlement in a more efficient manner. Introducing new technologies to areas without a lot of infrastructure or with highly manual or fragmented solutions also presents interesting opportunities. DTCC’s Project Whitney looks to introduce technology and tokenization of assets to help solve pain points in the private markets space and bring stakeholders together in a platform for network effects.

“When looking at changing an existing critical market infrastructure with interconnected pipelines and multiple stakeholders, it is critical that the modernization be as robust and resilient as existing applications.”

Role of Regulators

The role of regulators will need to be adjusted to reflect the differences of digital assets from traditional assets.

Moad Fahmi, Senior Advisor, Financial Technology, The Bermuda Monetary Authority (BMA), noted regulators are categorizing digital assets by broad categories to ensure a higher level of legal certainty and providing the flexibility to adapt to different products. By evaluating the platform first, and then the product, this type of regulation aligns with how companies are developing their infrastructures. Digital assets live in a value chain, and the transactions may have many different layers, including the exchange, issuer, wallet provider, and custodian. By regulating the entire value chain, the consumer is afforded more protection.

“Financial institutions have an obligation to protect customer assets and ensure the soundness of markets,” Peve commented. At the same time, there is a realization across the industry that many firms are looking at the crypto space, and that imminent changes are present.

As firms look at crypto, non-fungible tokens (NFTs), digital assets, and legacy businesses, there will be a convergence as firms decide to be disruptors or innovators. However, the financial industry still needs to protect mainstream investors while providing greater access to new and different products.

Future of Digitization on Capital Markets

NFTs are capturing a tremendous amount of attention as they transition traditional business models into digital representations. The popularity of these instruments is drawing the attention of retail investors, and financial institutions and regulators will need to consider how this momentum adds to new business models when researching newer opportunities.

Steve Kokinos, CEO, Algorand Inc., stated changes are already in place for the future of digital markets, as banks add crypto trading desks, custodian crypto assets for clients, and hold bitcoin on their balance sheets. Traditional finance is blending with newer models and has more new entrants with a much higher dollar value than just a year ago.

Looking ahead, there will be new entrants and business models pushing the envelope and using technology in a more meaningful way. Monitoring the success of these models should provide a glimpse of the future for the financial industry. Peve concluded, “DTCC is looking to use innovation in a more meaningful way and has tremendous enthusiasm about doing things in a different way to make lives and opportunities better.”

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