Emerging technology is driving market structure discussions globally, and it’s increasingly clear that future financial markets will not be underpinned by just one technology as our use of these tools continues to evolve.
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This rapidly changing ecosystem presents incredible opportunities to the industry predicated on identifying the right solution that generates client value. This means targeting new business models in underserved markets or assets, identifying enhancements to existing products and services, and/or finding opportunities to complement existing businesses with new features to enhance the client experience. Only when the opportunity is defined, can the appropriate technology be applied to enable and deliver that client value.
Much of this work, and technology enablement, also will depend on how quickly new technologies mature and are widely implemented. There have been several projects and initiatives that serve as excellent proofs of concepts regarding how the industry can embrace emerging technologies to streamline processes, broaden distribution, improve client service and ultimately reduce costs and risk.
“While it’s impossible to describe the myriad of ways that emerging technology is being used, there are three— blockchain, artificial intelligence and cloud—that are converging to create a new digital ecosystem.”
First, firms are increasingly leveraging smart contracts to tokenize fixed income and alternative assets, such as private debt or equity markets. For example, some firms are executing pilot issuances across assets, with a majority leveraging bonds on a global basis. The tokenization of assets has the potential to enable faster, more transparent, secure and efficient processing for certain use cases today and will continue to be explored for asset issuance, new custody models and alternative payment/settlement rails.
But as the digital ecosystem grows, there are several protocols being used, inconsistent standards and varying regulatory regimes. All of which leads to fragmentation and siloes across the industry for digital assets. It’s clear that the industry must work collaboratively to establish consistent standards, guardrails, network rules and protocols for digital securities to enable, rather than inhibit, the growth of this ecosystem.
Second, artificial intelligence is being used broadly—primarily in a way that is process-focused rather than asset-focused—and is enhancing the client experience and providing data insights for personalization and self- service. In addition to being used in algorithmic trading, AI also is assisting with reconciliation to help detect possible settlement failures before they occur and anomalies in data sets. The broad growth of AI and the development of large language models (LLMs) will offer opportunities for improving operational efficiencies and enhancements for clients in the future, but currently pose enormous— and yet unaddressed—challenges for maintaining privacy and ensuring proprietary information is not stored in chatbots.
Third, the effectiveness of AI depends on high-quality, unbiased data, and we’re seeing cloud technology intensely leveraged to provide that data. For example, DTCC is using Snowflake’s Data Cloud to support our Kinetics data business, which offers clients more immediate market insights across multiple asset classes and provides users with greater interactivity and access controls. Ideally, data from transactional systems that is placed onto the cloud becomes part of a data ecosystem that has analytical depth and breadth. That data can be analyzed by clients, often with applications that enable them to obtain data in near-real time, to develop strategic insights for more effective decision-making.
Clearly, challenges remain as the adoption and use of these technologies have not reached the maturity level to promote wide-scale use in financial markets. Looking to the future, the use of emerging technologies must be examined on a case-by-case basis, focusing on activity rather than asset classes.
As we have for 50 years, DTCC is exploring uses for emerging technology while working closely with regulators and industry stakeholders to help create the same confidence, operational and capital efficiencies in the digital asset ecosystem that investors rely on within traditional markets.
And as the industry moves forward, we must embrace one overarching theme: Any technology we use to enable growth and deliver client value must never introduce new risk into the system. We must understand the complexities and the interconnectedness of technology to establish governance models and move forward. By keeping that idea at the center of all we do, the opportunities are endless.
This article was originally published to Views The EUROFI Magazine in April 2023.