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Leading the Path to the Future: Advancing the Digital Asset Ecosystem

By Stephen Prosperi, DTCC Executive Director, Innovation Strategy & Digital Assets | 4 minute read | March 12, 2024

Over recent years, there has been increased momentum in the adoption of digital assets and distributed ledger technology (DLT). While industry reports continue to project growth in digital assets, last year, most projects (74%) involved six or fewer participants, highlighting the next challenge for the financial industry: how to progress from the current smaller, isolated projects to meaningful, industry-wide initiatives that support the scale of the global financial markets? After years of exploration, many in the industry want to see results. Three things will be critical to realizing these results: leveraging FMIs to advance the ecosystem, ensuring use cases deliver real near-term value and working with regulators to protect, and propel the ecosystem.

Related: Moving Digital Infrastructure Toward the Center of the Financial Universe

Leveraging FMIs to Advance the Ecosystem

As regulated entities governed by rules that promote safety and soundness, orderly markets and the safekeeping of investor assets, FMIs have a proven track record in establishing operational standards and maintaining high levels of operational resilience. Because of this, FMIs are well positioned to bring these same benefits to the digital asset ecosystem.

For example, FMIs can help progress digitization efforts by encouraging standardization of smart contract controls, data and processes. Smart contracts, which are decentralized computer applications that can automatically execute agreements based on predefined conditions, offer the potential streamline and automate thousands of disparate financial processes. However, if each financial institution develops their own smart contract standard, spread across infinite DLT technology stacks, it could create a patchwork of decentralized systems that are more complex than today’s systems and processes. To avoid fragmentation, FMIs can help to develop consistent standards and controls that support an interconnected ecosystem while providing governance of decentralized applications to ensure they remain compliant and secure. This mutualization function will reduce industry costs and accelerate the industry-wide adoption of Web3.

Delivering Real Near-Term Value, with New Business and Operating Models

As we consider the path forward, the industry must shift its approach from a re-platforming mindset to seeking new business and operating models that maximize the value of the tech. Solely replicating existing processes or undertaking lengthy and costly re-platforming exercises will not lead to the successful digitization of financial markets on any near-term timeline. We need to think differently and lean into what differentiates this technology and the impact it could have on our ecosystem. Several potential use cases come to mind: first, use cases that notably improve the rails upon which assets move (think infrastructure for private and alternative assets which are massive in size, but still incredibly manual in nature), and second, use cases that create meaningful capital efficiencies (think solutions that facilitate streamlined and optimized movement of collateral measured in seconds, not days).

DTCC’s recent acquisition of Securrency to form DTCC Digital Assets, a developer of institutional grade, digital asset infrastructure, underscores our commitment to unlocking the value of digital assets and providing new operational capabilities and models to guide the industry safely through its transformation. The new capabilities will be a key enabler to fostering industry-wide collaboration to promote acceptance and adoption of digital assets.

Working With Regulators to Protect - and Propel - the Ecosystem

Safety and soundness are a top priority for regulators around the world. As the digital asset ecosystem evolves, regulators will continue to expect those performing regulated activities in the form of digital assets to adhere to the foundational requirements which ensure the same, if not greater, integrity of our markets. This means considering any shifts in business/operating models and market structures that may result in the use of the underlying technology. We are still in the early days of DLT adoption and what’s possible - we should work closely with regulators to advocate for rules that evolve alongside the industry’s use of the technology.

“It is likely that broader adoption of new models will drive significant industry transformation.”

Ultimately, digital assets present a tremendous opportunity for financial markets - as use cases come to fruition leveraging the learnings from past exploration, it is likely that broader adoption of new models will drive significant industry transformation. FMIs will play a critical role in helping drive industry consensus around the standards, controls and frameworks that will enable scale. At the same time, the industry will seek new ways to operate and deliver client value. We expect that regulators will stay close to the topic and set guardrails to help protect investors and the market. And in the end, real transformation will occur. With time and focus, the industry will see results.

This article was originally published to Views The Eurofi Magazine on February 21, 2024.

Stephen Prosperi
Stephen Prosperi

DTCC Executive Director, Innovation Strategy and Digital Assets