The affirmation came from discussions at City Week 2023, as part of an asset tokenisation and institutional adoption discussion and a blockchain technology panel.
Mathew McDermott, global head of digital assets at Goldman Sachs, listed a number of benefits that tokenisation could bring to the industry, including greater transparency, liquidity availability and a broader investor base.
Digitising the instrument lifecycle could improve the efficiency of operations and settlement and allow for a more precise use of balance sheet resources, giving investors the ability to make more informed decisions, he added.
One speaker argued that tokenisation of assets is the most promising use case for blockchain. This will allow for greater transparency, reduced risks and smaller margins, he said, with the technology facilitating faster settlements and therefore reducing liquidity requirements.
Transparency is a key benefit of blockchain technology, allowing regulators to monitor markets in real-time. This can also help anti-money laundering (AML) initiatives, according to another panellist. He emphasised blockchain’s potential to reduce risk in high-risk areas, advising audiences: “don’t underestimate what it can do for anti-money laundering and know your customer operations.”
One speaker suggested that his firm’s successful tokenised issuances demonstrate progress towards more mainstream adoption of new infrastructure. As the industry finds more use cases for tokenisation, the more justified the effort of adoption is, he argued.
Across both panels, the main barriers to tokenisation adoption were considered to be shortfalls in common standards, regulation and interoperability. Panellists agreed that international harmonisation needed to be a focus going forwards, with one panellist stating that a “complete lack of uniformity” across jurisdictions is currently “constraining technology” and slowing widespread adoption. In terms of what needs to be done to drive further adoption, the speaker named regulation, the industrialisation of workflows and wallet management as priorities.
Another panellist highlighted the need for an understanding of a system’s strengths and limitations — something that cannot be fully understood before the system is built.
They went on to affirm that blockchain is lowering the barrier to entry for smaller issuers, reducing costs and accelerating operations. In traditional finance, investment has to be made in back-office systems to run bonds in traditional finance, with high technology and data entry costs making it unviable for smaller firms to engage. However, he warned that atomic settlement will still be impossible for many financial instruments due to bond recommendation and legal processes that can take up to five days. Although more simple aspects of the process can be automated, a human element remains necessary for more complex instruments, he added.
Continuing the theme of accessibility, Xiao-Xiao Zhu, digital operating partner and blockchain lead at investment manager KKR, raised the point that blockchain could be an avenue to make private funds more accessible to smaller investors. By avoiding the implementation of expensive and complex back-office operations, blockchain could play “an important role in shaping the future of private markets,” he said. Referencing small-scale pilot schemes already in place, lowering investment minimums without regulatory challenges and seeking to increase liquidity, Zhu stated that “it’s important to create optionalities and see what’s out there.”
Currently, numerous systems are in play without interoperability. The industry is currently on a “quest for the paradigm”, moderator Etay Katz posited, before questioning panellists on how scaled success can be achieved.
Previn Singh, head of digital assets and DLT centre of competency at Credit Suisse, called the development of DLT and other digital asset-related technology a “team sport”. He went on to say that the EU’s recent approval of the Markets in Crypto Assets (MiCA) regulation demonstrates the “hugely positive” regulatory environment in the jurisdiction, with MiCA promoting important and relevant regulatory points that will improve market availability for products and infrastructure.
Singh stated that blockchain has been a “grassroots” technology, originating at a retail level and working its way up to institutional and banking levels. He emphasised the need for collaboration and cooperation across the industry, with the establishment of common standards and ways of working as important factors that firms need to consider.
This need for harmonisation was echoed throughout the conference, with regulatory progress commended but the need for clear, shared definitions across the market stressed by a number of panellists. Reaching regulatory clarity will take time, they agreed, however speakers were optimistic that it is possible.
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