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Fireside Friday with DTCC Digital Assets’ Nadine Chakar

By Wesley Bray | 5 minute read | March 27, 2024

The TRADE sits down with Nadine Chakar, global head of DTCC Digital Assets, to discuss how digital assets are impacting traditional financial markets, their influence on traditional trading practices and how market infrastructure can help bridge these two separate worlds together.

Related: Bringing Traditional Assets to Digital Networks

What impact has digital assets had on traditional financial markets?

If we were having this conversation just three months ago, I’d tell you that the digital and traditional markets are operating in entirely different universes. Now, I think we’ve reached a turning point as both sides are starting to converge. We’re hearing a lot more chatter now on the traditional side, especially after the arrival of bitcoin ETFs in the US, and with crypto prices on a recent tear.

Until both sides come together, it’s safe to say we haven’t seen digital assets make a big impact on the traditional side so far. We see companies exploring blockchain technology with their own pilots, but much of this experimentation is occurring in siloes, rather than at an industry level.

While we haven’t seen meaningful, industry-wide collaboration on digital assets yet, we do seem to be very much aligned on one thing: the enormous promise that tokenisation offers. Across the industry, many of us understand that tokenisation has the potential to transform the financial markets: helping firms do business faster, cheaper, and simply – better.

Traditional financial firms should continue to explore how they can harness digital asset technology to unlock the full potential of their existing, traditional capabilities. Tokenisation can bring many benefits to nearly every corner of the financial markets. It can help facilitate efficient capital management, optimising operations like corporate actions, distribution, lending, and pricing through automation. It can give firms access to new markets and new ways of unlocking liquidity.

In what ways are traditional trading practices being influenced by digital assets?

We are definitely seeing the buy-side dipping their toes into the digital waters. I think a lot of traditional traders are intrigued by the attributes they find in digital markets. The ability to trade 24/7 in a peer-to-peer network environment is exciting. They also recognise the potential in the transparency that the blockchain offers.

Let’s first consider the trading platforms themselves. Traders are always looking for faster, more integrated trading platforms to streamline their operations. Enabling traders to interact with digital assets alongside traditional is clearly the desired outcome. Traders recognise that this would be a game-changer.

Another example is collateral management and giving firms the ability to tokenise their collateral. This would make them more agile and give them better liquidity. Real-time collateral management could reduce risk and increase capital efficiency.

Of course, another area that will likely continue to be influenced is algorithmic trading. Leveraging smart contracts, or automating and simplifying complex financial transactions, coupled with the power of AI – spells big potential for making trading faster, transparent and more efficient.

How can market infrastructure help bridge these two separate worlds together?

Market infrastructure is the foundational piece needed to bring these worlds together. Of course, firms are not exactly looking to jettison their existing systems for new ones. The ability to connect traditional systems with digital is critical. We also need to ensure we’re facilitating how assets and processes can move across multiple blockchains. Our solution, Capital Markets Platform, helps clients harmonise and integrate these technologies. Infrastructure can also support firms with data, giving them the ability to scan and distil on-chain and off-chain data to support regulatory and market requirements.

Infrastructure will enable this integration but a clear legal and regulatory framework to establish controls and standards is essential. That includes standards for data, including its use and collection, methods that protect private data, and establishing exactly what data is allowed on-chain. We need harmonised standards across processes, platforms and jurisdictions, similar to what we saw with the global harmonisation of anti-money laundering (AML) and know-your-customer (KYC) rules after the financial crisis.

Luckily, DTCC has been bringing this sort of expertise to the markets for 50 years. We are the largest market infrastructure for the largest capital markets in the world. We can help guide the evolution of the regulatory framework over time to support digital assets. We already have deep experience in creating systems that are secure and that work at-scale. Our established ecosystem for traditional securities is the solid foundation – upon which we can help lay the digital railroad tracks for the industry.

As part of this, we recently released an industry paper together with Euroclear and Clearstream calling for increased collaboration to progress an ecosystem that currently includes fragmented standards, varying regulatory treatment, limited integrations with institutional-grade payment rails and siloed liquidity – all limiting factors to the further digitisation of global financial markets.

What are the key elements necessary for the wider adoption of digital assets?

Aside from a legal and regulatory framework, as well as the infrastructure to help inject confidence into the system, there are other key hurdles. The role of education is also really important, and continuing to make sure people understand that we’re not necessarily focused on cryptocurrencies – but on tokenisation, the underlying technology of crypto, which offers the true potential to democratise finance in a way we’ve never seen before.

As I mentioned, we’re seeing digital asset experimentation occur in pockets across the industry. The experimentation is encouraging, but it only leads to more fragmentation in this space.

We’re calling for a shift in approach here: we need to move away from these discrete experiments and better foster industry-wide collaboration that prioritises broad ecosystem development. It’s very important that we shift our approach toward incremental pilots and exploration of processes that build upon each other, as part of a larger interconnected ecosystem. Our industry sandbox, DTCC Testnet, is a DLT ecosystem designed to support innovation at-scale, giving the industry a safe place to explore the interaction of digital systems with traditional processes, and allow them to fine-tune these processes to make sure they support existing and emerging legal and regulatory structures.

I’ll leave you with one takeaway: we need to work together to come up with this new digital language, one that will allow us to better communicate and do business with each other. That includes making sure regulators are comfortable that we’re doing this in a responsible and transparent way. At DTCC, we are excited for the opportunity ahead. Join us as we continue our path to build out an efficient digital market structure that makes the traditional financial system faster, cheaper, better and accessible to all.

This article was originally published to The TRADE on March 15, 2024.

Nadine Chakar
Nadine Chakar

DTCC Managing Director, Global Head of DTCC Digital Assets