The future of digital assets
Creating a digital asset market is a significant undertaking, involving the creation of an infrastructure and regulatory framework. What can we learn from the Swiss experience?
The advent of digital assets and digital asset markets creates major opportunities for innovation and transformation of processes, products and services within financial services.
At BT Radianz, we see digital assets as a natural evolution of existing asset classes. They provide a way to digitise previously illiquid assets, such as real estate, patents or art, and open up access to a wider pool of investors and capital.
As an integral part of helping capital market innovators and disruptors distribute their services, we’ve been following the emergence of digital asset markets closely, so we can be ready to bring together the necessary infrastructure and participants.
This is what we’ve learnt about what changes will be necessary to support digital asset markets.
Building infrastructure and redesigning technology and processes
Digital assets aren’t just about transforming the way financial instruments are represented. They need the support of a digital market infrastructure that can facilitate listing, trading, settlement and custody of digital assets, in an accessible and regulated way. In most jurisdictions, this market infrastructure is still emerging, and regulators are still adapting frameworks to support this new model.
Participants will have to redesign their technology and processes too. To unlock the full benefits of a digital market, they’ll need to be able to support immediate settlement and the ongoing automated management of corporate actions and life-cycle events. For many financial institutions, this is going to be the biggest barrier to adoption. Re-engineering on this scale doesn’t come cheap – and it takes time. However, in an environment increasingly focused on cost-cutting and greater automation, the benefits are clear – as we can see if we look at what’s happening in Switzerland as an example.
The ingredients of a digital asset market
In our recent paper on digital innovation in capital markets, we spoke with Tim Grant, the CEO of SIX Digital Exchange (SDX), who gave us an insight into the ingredients needed to successfully build markets in digital assets, and the exciting new opportunities they offer.
SDX is based in Switzerland, a jurisdiction that’s fully committed to developing a digital asset market. SDX is also actively engaged with the Swiss regulator, FINMA, as it develops the regulatory framework that will ultimately govern and give certainty and confidence to the Swiss digital asset market. SDX provides much of Switzerland’s existing financial market infrastructure, so it was a logical step for them to also build its digital market infrastructure. This includes a digital central securities’ depository (CSD) based on distributed ledger technology (DLT) – something that’s never been done before.
It’s a brave new world, and one that’s difficult to navigate without large-scale change. For example, to benefit from immediate settlement of the digital asset leg of a transaction, there needs to be immediate settlement of the payments leg. And financial institutions want to settle in fiat money (central bank-backed currency), rather than in a cryptocurrency such as Bitcoin, or a privately issued stablecoin that can open them up to counterparty risk.
The final missing piece of the puzzle is the need for a central bank digital currency (CBDC) to provide the means for settlement of the payments leg. For this purpose, the Swiss National Bank is actively working to facilitate the creation of a Swiss wholesale CBDC.
It’s essential to focus on future benefits
It’s this infrastructure and regulatory framework that will need to be replicated across other global financial centres if we’re to truly see the emergence of digital asset markets. But from any aspect, it’s going to take a lot of work. So, what are the benefits of supporting this transformation, from a central bank or regulator’s point of view?
Grant believes that: “there's no question that in 10-15-years’ time – especially in the post-trade area, in terms of custody, asset servicing and other post-trade elements – we’ll be able to create material efficiency gains by having this new, faster, better, cheaper infrastructure”.
It’s also about creating new liquidity opportunities. Digital assets more naturally lend themselves to a global investor base, with the ability to have built-in multi-jurisdictional compliance. Equities and FX markets are already highly efficient, but Grant cites bond and loan markets as being ideal beneficiaries of a digital transformation, with potential for huge efficiency gains and new liquidity opportunities.
Digital asset markets also open up opportunities for greater democratisation and accessibility of finance – both for investors, who can benefit from fractional ownership opportunities, and for companies previously excluded from access to traditional capital markets. Grant also looks beyond this, to the sustainable markets of the future, and the benefits that digital assets can bring to green finance, carbon credits and emissions trading.
Grant concludes, “When we start to consider all this in the context of global liquidity pools, if we can make this more accessible and open, then we’ll see value generated at the intersection of these previously walled gardens. If we can bring these walls down, then value can accrue to everyone in the ecosystem”.
Getting ready for a digital asset market
At BT Radianz, we can provide digital asset service providers with the right technology services. From access to public clouds and hybrid cloud services, to supporting DLT applications and supplying a trading hub, we’re ready to provide the infrastructure a digital asset market will need.
To find out more about how we help to bring this future to life, please get in touch with your account manager.