News & Insights
A recent Nasdaq survey of post-trade service providers found that 78% of financial market infrastructure (FMI) budgets are dominated by maintaining and upgrading legacy technology.This leaves relatively little else to be spent on growth opportunities emerging from new asset classes and services as firms also grapple with significant regulatory changes, such as T+1.
However, new technologies have the potential to unlock substantial new revenue streams for FMIs, who also have a tremendous opportunity to capitalize on the global push to harmonize digital and traditional markets.
One such example is tokenization – the process by which underlying securities are represented by a digital ‘token.’ While typically associated with distributed ledger technology, there are many ways organizations can begin to embrace the technology without having to overhaul entire systems.
Developing a business case
It’s often difficult to build a business case when dealing with the many costs associated with legacy systems.That becomes even more difficult when there is a perception that change might impact the resilience of those existing systems, which are already used for business-critical processes.
The case for change must not only be focused on the potential to increase overall resilience but also make it easier to continually develop and enhance the underlying platform, which will support the continued growth of the business.
If you imagine a world where FMIs have modular modern systems that are API-driven and have adopted global standard market practices and protocols, then these issues start to fall away.FMIs should be able to make small, frequent, incremental changes that may not impact participants in a significant way.This would allow FMIs to move away from large, multi-year costly projects and instead offer small changes on a constant basis that are easier for participants to accept and adapt to.
Technical compromises between emerging and traditional technologies
There are multiple ways CSDs can approach emerging technologies, such as tokenization through a flexible and phased approach:
– The application layer – employing the use of smart contracts to execute complex multiparty workflows integrated with existing systems
– The distribution layer – operating on a single node or on multiple nodes if firms wish to distribute workflow between participants
– The ledger layer – working through a central database or an enterprise blockchain solution
This flexibility can serve as a powerful way of getting started with a CSD’s digital journey, gaining the benefits of smart contract implementation without the complexity of distributing nodes and the cost of an enterprise blockchain.Importantly, it allows firms to move to distributed topology later and/or adopt blockchain as the business case arises.
Real-life example
A great example of this is Depósito Central de Valores (DCV), Chile’s Central Securities Depository, which can now digitize securities and is initially planning to do so on a central private database with the ability to move to distributed ledgers as the broader ecosystem evolves.
Importantly, it means that they are well-positioned for growth in the future as the digital asset ecosystem evolves.
Another example is carbon markets, where strictly speaking, tokenisation of carbon credit is not required, but using smart contracts to serve multiparty workflows can be a great use of the technology.
Ultimately, those who embrace disruptive technologies will stand to gain from leading that new ecosystem of service providers and avoid losing their competitive advantage in the future.
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