There isn’t a day that goes by without stories related to digital assets hitting the headlines. However, less discussed, is how the financial services industry’s post-trade infrastructure should evolve to support this new and evolving space. Therefore, it was with great interest that I agreed to participate in a recent Sibos panel to discuss the evolving digital asset space and how post-trade infrastructure could accommodate the safe processing of digital assets.
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This was a timely discussion given that digital assets are continuing to gain traction across the industry. There are a multitude of different types of assets including digital securities, non-fungible tokens, central bank digital currencies and crypto currencies. At the same time, there is a corresponding amount of investment in this space, with financial institutions increasingly launching services around these assets. Adding to this interest and growth, society is increasingly embracing technology advancements. Over the last few decades, there has been ongoing development of various forms of digital assets, from airline loyalty points to gaming tokens to payment apps, and we have moved to an environment where many of us trust technology and digital assets in our personal lives. This trend has been taking shape in small increments over an extended period time to the extent that now, the idea of digital assets entering the financial markets is more acceptable than not for many of us.
Which brings us to a critical consideration: with evolving societal views and a likely increase in the adoption of digital assets in the future, how do we safely and competently bring these assets into the financial ecosystem in a way that reduces risk and promotes stability? First, well established technology and operational processes have been implemented across the financial system for a multitude of assets and are effective. Infrastructure providers must consider how to apply these proven governance models to support this evolving asset class. At the same time, infrastructure providers must continue to innovate, and digital assets offer an interesting area of opportunity, introducing optimisation and efficiency capabilities that can enable further digital transformation.
Digital assets present a tremendous amount of opportunity to financial markets and ultimately for investors. Critical to their success will be developing use cases across financial markets that create value for clients .
That said, the sheer complexity and risk to the markets of a wholesale transformative implementation makes this outcome unlikely and undesirable. However, market infrastructure providers are uniquely positioned to spot ‘white space’ or green field opportunities and leverage technology to create growth in those areas. With infrastructure investment focused on those areas of the post-trade process where there is inefficiency due to a lack of appropriate infrastructure or where new services could be enabled by technology advancements, it can facilitate a shift in the ecosystem. It also could help to establish the foundation for new ways of working, thinking and problem-solving.
Lastly, to move the industry forward, the implementation of any change in post-trade infrastructure to support digital assets must be inclusive and accessible to all. Today, not all financial market participants have the same capability levels when it comes to the adoption of new and evolving technology, and as a post-trade provider, it is essential that the entire community is served. This means that any innovation plans and the associated rollout to support digital assets may have to be adapted to accommodate industry variations in technological sophistication, while ensuring the new capability delivers value.
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At DTCC, for example, we have focused on how APIs, which are fairly ubiquitous now, can enable efficient connectivity for clients. APIs help balance the consumption and processing of data for clients who may not be prepared to adopt more novel technology for similar purposes. Project Ion, which leverages DLT to bring new efficiencies to settlement, will be ready for adoption in Q1 2022, and clients can benefit from the new platform without requiring full market adoption of DLT because of the integration option via APIs.
Digital assets present a tremendous amount of opportunity to financial markets and ultimately for investors. Critical to their success will be developing use cases across financial markets that create value for clients. At DTCC, our role is to identify high potential use cases in the post-trade space – working collaboratively with our community, while applying responsible innovation to implement new, but safe, processes and capabilities that bring increased efficiency and risk management capabilities to financial markets.
This article was first published in Global Investor on October 11, 2021.