2024 will be remembered as a pivotal year for digital assets, from the approval of the first spot Bitcoin ETF to the impact of the U.S. presidential election heralding a digital asset-friendly administration. As firms across Wall Street accelerate their work in the digital asset space, I had the opportunity to speak at Benzinga’s Future of Digital Assets 2024 on a panel moderated by Kyle Braden, VP, US Direct, BlackRock that featured David Alderman, Research Analyst, Digital Asset Management, Franklin Templeton and Chuck Mounts, Chief DeFi Officer, S&P Global Ratings to discuss the critical need for digital cash policy formation to support the adoption of digital asset solutions.
The need for money’s digital evolution cannot be understated. Payments power capital markets. A thriving digital assets market requires payment mechanisms that operate with the same efficiencies as the underlying transactions, such as settling the cash leg of DvP, coupon payments, and cash payouts (i.e., P&I, dividend distribution). A digitally native solution that embeds money in the same distributed framework as the assets themselves will maximize the speed and cost-effectiveness of payments, as well the connectivity to lifecycle services such as collateral management and asset servicing.
Related: Transforming Collateral Management with Digital Assets
Without the implementation of digital cash solutions, the widespread adoption of digital assets will be hindered by the prolonged settlement cycles associated with fiat payment systems. However, industry participants are getting more creative and carving a path forward after facing years of operational challenges and a lack of regulatory clarity.
The election is a significant development in moving the U.S. off the sidelines and positioning it in center stage of policy formation and harmonization—not only in the U.S. but globally. One of my fellow panelists noted the new administration, as well as the Senate and House, are embracing digital assets with an approach to increase their regulatory compliant speed to market. In particular, stablecoins look positioned to be the accelerant for TradFi and DeFi capabilities, but as Wall Street accelerates its engagement with stablecoins, and other forms of digital cash, open issues across technical standards, data standards, governance models, asset portability and consistent legal frameworks still remain.
For firms to truly embrace digital assets, market infrastructure must evolve to support these novel solutions. I’ve identified three key obstacles to overcome before digital assets infrastructure can progress.
- Infrastructure: Principles need to be applied to projects at inception for directional harmony. The industry needs a common infrastructure that supports both traditional and digital assets, including establishing standards around data, good control locations, and achieving finality of settlement. DTCC is actively working to address these issues on a global scale.
- Liquidity Pools: Years of smaller deployments have resulted in sub-scale, isolated pools of liquidity on proprietary DLTs, creating obstacles to growth. Today’s digital asset initiatives are also highly disparate, with varying standards and propositions related to settlement and custody processes and inconsistent approaches. While there is value in the many initiatives underway, now is the time for us to begin taking a collaborative mindset to address issues around access, interoperability and standards.
- Settlement: The issue of digital asset settlement requires a deeper conversation. Real-time gross settlement, the native settlement model of tokens, would result in every transaction needing to be pre-funded at execution and the loss of capital efficiencies from netting during settlement. More research and analysis are needed, including the consideration of T0 end of day net settlement to address these issues.
The industry is in various stages of experimentation and adoption, but more work will need to be done to enable Wall Street to deliver on the promise of regulatory compliant digital asset solutions. DTCC Digital Assets believes the way to achieve this goal is to support collaboration on industrial scale solutions and is prioritizing this work through DTCC LaunchPad, an environment that enables clients to explore digital solutions that support and advance the digital asset ecosystem.