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The Essential Role of FMIs in the Future of Digital Assets

By DTCC Connection Staff | 3 minute read | November 1, 2022

The level of interest in digital assets is growing – particularly among institutional investors. But as digital assets strive to reach mainstream, safety and regulatory questions remain, mainly around trust, governance and good control locations.

Related: DTCC's Jennifer Peve discusses evolving innovation strategies for market infrastructures

In Amsterdam at Sibos 2022, DTCC’s Stephen Prosperi, Director, Business Innovation and Fintech Strategy, shared his perspective on the future of the digital asset ecosystem, including the critical role FMIs will play as part of the “Servicing Digital Assets: Who Will Win the Battle?” industry session. Below is a summary of the discussion:

The Future Role of FMIs
As the industry moves forward in this decentralized world, the role of market infrastructure firms will be extinct – but only as investors know them today. The future role of FMIs when it comes to digital assets comes down to delivering interoperability, breaking down silos and enabling regulatory compliant interactions with a more distributed market.

From the vault to a centralized database to a network, the role of market infrastructure will be different but still remain a necessity. There will always be a critical role for FMIs to enforce industry standards, enable interoperability and prevent silos in this new landscape. DTCC’s role as the premier post-trade organization that promotes financial stability and industry standards remains unchanged.

Delivering Interoperability
FMIs are best placed to ensure interoperability in the digital asset ecosystem as they are neutral and heavily regulated, with some also being industry owned. Digital assets offer a unique opportunity for new operational processes to be established and handled through automated technology. However, a key factor in realizing this opportunity will be ensuring interoperable technology stacks and standards across the industry.

FMIs can also help bridge the gap and deliver interoperability between digital assets and traditional assets. There is currently heightened focus on new, digital assets that hold promise of a more efficient and distributed future, but we must not forget the roughly $100 trillion of ‘traditional’ assets that are already outstanding.

Breaking Down Silos
A consistent approach to the processing of digital assets will lower the risk of silos being developed. There is also an opportunity for market infrastructures to breakdown silos in the world of decentralized finance (Defi). Currently, Defi on ramps /off ramps are being created through the tokenization of assets, the creation of permissioned sub-layers and the adoption of protocols to interact with these assets.

While these efforts appear to be supporting adoption in the near term, they could drive fragmentation in the longer term, as the digital assets ecosystem develops. In a world where financial institutions continue to have fiduciary responsibilities and regulatory oversight, market infrastructures can serve a key role in providing unified on/off ramps or, at the very least, connecting existing ramps through a series of standards and practices.

Digital Asset Initiatives
DTCC is focusing on the future tokenization of assets, including Project Ion. Built as an alternative trading settlement platform, Ion leverages a permissioned DLT infrastructure and is an essential step in advancing digitization in financial markets. The project is running in parallel processing at an average of over 100,000 bilateral equity transactions per day while continuing to uphold the firm’s rigorous resiliency and safety standards.

The lack of a consistent approach in meeting “good control location” requirements is an issue in the pre-IPO market as broker/dealers need to evidence custody to carry accounts for clients. DTCC’s Digital Securities Management (DSM) platform seeks to solve the good control location ‘problem’ of securities custody in a space that lacks infrastructure and efficient processing. DSM is pending regulatory approval and is an important step forward in realizing a vision of securities on a blockchain.

In this shifting landscape, DTCC’s role as the premier post-trade infrastructure firm will be to ensure interoperability between blockchain solutions, create and promote industry standards and ultimately prevent digital asset ecosystems from developing into silos.

Stephen Prosperi
Stephen Prosperi

DTCC Director, Innovation Strategy & Design


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