AFME: The regulator will ‘struggle’ to catch up with the evolving digital assets space
19 October 2021 UK
Image: Brian Jackson/adobe.stock.com
It is an exciting time for custodians in the digital asset domain but there are lots of considerations to take into account for products and services in this space, as well as organising the institutional demand versus the retail demand, according to AFME panellists.
During the Association for Financial Markets in Europe (AFME) panel discussion on distributed ledger technology (DLT) and digital assets, panellists agreed the industry is entering a fascinating era and the regulator will struggle to catch up because the system is evolving rapidly and becoming extremely dynamic.
From a custodian viewpoint, Nadine Teychenne, director, head of digital assets, securities services, Citi, said: “Citi’s direct custody business is in 64 global markets and we're tracking many DLT based projects across those markets and working with the local market infrastructures.”
“On top of that, a new financial market infrastructure entrance is emerging so I think we'll start to see the increased development of fragmentation; clients will want to invest in traditional assets and traditional markets alongside evolving digital markets.”
Teychenne suggested fragmentation in this space will increase over the medium term. Over the long term, over the next 10 years, she predicted that the markets will be fully digitised.
Consequently, local market regulations will need to support this, as they have done in Germany. Germany has changed regulations in order to allow digital issuances, which will need to occur in other markets as well.
“Once you start to see the DLT based markets issuing fully digitised assets from issuance through to trading and settlement, you can realise a lot of efficiencies both in trading and settlement as well as the post-trade/ asset servicing,” said Teychenne.
She continued: “We're seeing a lot of markets move to real time settlement but there's still a lot that needs to be solved for and there needs to be a deeper understanding about how it will work in a DLT based future.”
The panellists noted that one of the biggest challenges with settlement in Europe is fragmentation, which occurs in different platforms, services, and offerings.
Valeria Zafar, director for Europe, the Middle East and Africa business development, Digital Asset, cited: “Financial services infrastructures are filled with inherently interconnected activities, both at a single institution level and multi-institutional level.”
Zafar noted there is a growing demand for financial services infrastructures to be even further interconnected, and very often they are unable to support that growth or it takes them a long time to support that growth.
This is because the infrastructures are still largely filled on premises databases that are ageing and quite fragile, according to Zafar. She explained that in order to support the workflows in a system, participants are massively reliant on bilateral messaging.
Zafar affirmed: “DLT and smart contracts language, which is purpose-built for multi-party workflows, allows enterprises to codify the rights and obligations of the parties in the chain, and share a single source of truth.”
“Therefore, the need for bilateral messaging or reconciliation is completely eliminated. At the same time, they allow institutions to retain the sub-transactional level of privacy,” Zafar adds.
Panellists agreed that one of the key takeaways here is that consistency is key, particularly from a custodial perspective.
Zafar stated: “You can't have a different operating model in multiple markets so the solution for interoperability is going to be crucial. Additionally, not all smart contracts, and not all solutions, are interoperable, which is why there has to be good knowledge in the market about being able to understand it. The right investment decision must be made when looking into the technology.”
“So that choice today is absolutely critical. Certain smart contracts languages can lock you into underlying infrastructure which may prevent you from being able to communicate and /or transact across multiple networks. Choosing smart language technology that supports interoperability and is DLT agnostic will be critical to tackling the industry’s next big challenge” concluded Zafar.
During the Association for Financial Markets in Europe (AFME) panel discussion on distributed ledger technology (DLT) and digital assets, panellists agreed the industry is entering a fascinating era and the regulator will struggle to catch up because the system is evolving rapidly and becoming extremely dynamic.
From a custodian viewpoint, Nadine Teychenne, director, head of digital assets, securities services, Citi, said: “Citi’s direct custody business is in 64 global markets and we're tracking many DLT based projects across those markets and working with the local market infrastructures.”
“On top of that, a new financial market infrastructure entrance is emerging so I think we'll start to see the increased development of fragmentation; clients will want to invest in traditional assets and traditional markets alongside evolving digital markets.”
Teychenne suggested fragmentation in this space will increase over the medium term. Over the long term, over the next 10 years, she predicted that the markets will be fully digitised.
Consequently, local market regulations will need to support this, as they have done in Germany. Germany has changed regulations in order to allow digital issuances, which will need to occur in other markets as well.
“Once you start to see the DLT based markets issuing fully digitised assets from issuance through to trading and settlement, you can realise a lot of efficiencies both in trading and settlement as well as the post-trade/ asset servicing,” said Teychenne.
She continued: “We're seeing a lot of markets move to real time settlement but there's still a lot that needs to be solved for and there needs to be a deeper understanding about how it will work in a DLT based future.”
The panellists noted that one of the biggest challenges with settlement in Europe is fragmentation, which occurs in different platforms, services, and offerings.
Valeria Zafar, director for Europe, the Middle East and Africa business development, Digital Asset, cited: “Financial services infrastructures are filled with inherently interconnected activities, both at a single institution level and multi-institutional level.”
Zafar noted there is a growing demand for financial services infrastructures to be even further interconnected, and very often they are unable to support that growth or it takes them a long time to support that growth.
This is because the infrastructures are still largely filled on premises databases that are ageing and quite fragile, according to Zafar. She explained that in order to support the workflows in a system, participants are massively reliant on bilateral messaging.
Zafar affirmed: “DLT and smart contracts language, which is purpose-built for multi-party workflows, allows enterprises to codify the rights and obligations of the parties in the chain, and share a single source of truth.”
“Therefore, the need for bilateral messaging or reconciliation is completely eliminated. At the same time, they allow institutions to retain the sub-transactional level of privacy,” Zafar adds.
Panellists agreed that one of the key takeaways here is that consistency is key, particularly from a custodial perspective.
Zafar stated: “You can't have a different operating model in multiple markets so the solution for interoperability is going to be crucial. Additionally, not all smart contracts, and not all solutions, are interoperable, which is why there has to be good knowledge in the market about being able to understand it. The right investment decision must be made when looking into the technology.”
“So that choice today is absolutely critical. Certain smart contracts languages can lock you into underlying infrastructure which may prevent you from being able to communicate and /or transact across multiple networks. Choosing smart language technology that supports interoperability and is DLT agnostic will be critical to tackling the industry’s next big challenge” concluded Zafar.
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