Transformation is coming
27 May 2021
An abundance of partnerships and collaborations as well as increased popularity all point towards a transformational change in the digital assets space
Image: thanagon/stock.adobe.com
Transformation on a large scale is coming to the digital assets space. Increasingly popular, the infrastructure around digital assets in technology, regulation, and custody is certainly on the rise.
While technology is already an essential part of a digital asset, industry participants are finding ways to improve their offerings in this space, and although digital assets have had its fair share of criticism, with some saying they can be used for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them, the opportunities of digital assets are being realised.
Indeed, some experts have given them praise for their portability, divisibility, inflation resistance, and transparency.
Speaking from a Singapore perspective, Alexandre Kech, CEO Onchain Custodian, says: “With regulation in place in most tier 1 financial centres such as Singapore, with mature and entre-prise grade infrastructures having been developed the last two-three years such as custodians, and with the economical and financial uncertainties due to the printing of money by central bank, we do see an increase of interest from institutional investors such as financial institutions and corporates.”
According to Kech, family offices and affluent investors are also now buying bitcoin and other digital assets as a way to diversify their portfolio.
Running alongside this interest in digital assets, regulators are starting to take it seriously. Kech notes that in Singapore, the Monetary Authority of Singapore has established a licensing framework for digital payment token service providers as part of the latest version of the Payment Services Act.
Meanwhile, other countries such as Malaysia or Thailand have also worked on ensuring actors such as exchanges or custodians are registered or licensed and treated as the financial institutions they are. Over in Europe, Germany is working towards implementing the Markets in Crypto Assets (MiCA) regulation.
“These regulatory regimes include requirements around the prevention of money laundering and financing of terrorism which leverages the transparency of blockchains and bank like transfer of beneficiary and ordering customer information,” says Kech. With growth in digital assets on the rise, innovation and technology is certainly bubbling in this area.
The importance of blockchain
Blockchain is an integral component of a digital asset. The system of a blockchain records information in such a way that makes it near impossible to alter or hack. It is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
Cryptocurrencies represent a new form of a digital asset based on a network that is distributed across a large number of computers. This decentralised structure can allow them to exist outside the control of governments and central authorities.
Blockchains, which are organisational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
Jerald David, president at Arca Capital Management, explains: “Blockchain is a distributed software network that functions both as a digital ledger and a mechanism enabling the secure transfer of assets without an intermediary.”
So in terms of whether any other technologies could be used as for digital assets to record and validate transactions, David affirms: “Digital assets only exist because blockchain is being used to record and validate transactions. There are several other technologies like Excel that can also be used to record and validate transactions, but in order for it to be considered a ‘digital asset’, it must use blockchain.”
Although limited to the blockchain, there are lots of opportunities associated with this piece of technology.
For example, Allfunds Blockchain, the blockchain technology arm of Allfunds, is set to advance blockchain technology for the fund industry with its new partner and ConsenSys, the Ethereum software company. The solution includes advanced privacy features that enable participants in a blockchain network to control who is allowed to see information, and what nodes participate in the consensus validation of data containing confidential information.
And Allfunds and ConsenSys aren’t the only ones, BNP Paribas has also recently made moves in this space with its collaboration with Eastspring Investments, the Asian asset management business of Prudential, and Singapore-headquartered fintech firm Hashstacs (STACS) to implement a blockchain-driven solution.
Also in this year alone, technology company n-Tier has launched a new consensus-based reference data blockchain solution. Using a private blockchain to establish a consensus across firms on key data elements, n-Tier says the new solution will reduce reference data management costs and errors.
The movement in this space indicates that blockchain technology is continuing to show its worth for opportunities and use cases.
“Our market is moving at a frenetic pace. Blockchain technology has the potential to change finance in every sense of the word. Here at Arca, we always say, what the internet did for information, blockchain will do for asset transfer. Blockchain will allow for instantaneous transfer of assets globally creating a more connected, faster, simplified and inclusive global financial system,” comments David.
David suggests this creates tremendous opportunities on so many levels and is a paradise for individuals and companies that want to shape the future of commerce, finance, payments, insurance and other industries.
The Arca US Treasury Fund is a great example of this. Arca started with the notion that they could take a traditional financial structure — a closed-end fund — and could enhance the usability of the structure by introducing blockchain, which resulted in a faster, blockchain-based and more efficient product.
“We have barely seen the tip of the iceberg in terms of how impactful blockchain will be,” David says.
But there are some drawbacks and challenges too, and although experts say blockchain technology is not a difficult technology to conceptually understand, traditional finance can be wary of new technology and disruption.
Therefore, David notes that a lot of education has to be done to get companies and investors to participate in a system using blockchain solutions and the processes need to be defined.
“One challenge this presents is that we are creating the rules as the technology is only being developed. Interoperability between blockchains remains an open question as does regulation and how digital assets will be governed has not been finalised,” David adds.
Opportunities and new solutions in the pipeline
There are a number of opportunities for the development of digital asset infrastructure that could have the potential to transform how financial transactions are conducted.
While financial services have been embracing blockchain for the past decade, early adopters included DTCC and ASX who announced their intentions to re-create their backend technologies dating back over five years ago.
DTCC believes it is key to foster industry-wide collaboration and aligning the technology with the core principles of mitigating risk, enhancing efficiencies and driving cost efficiencies.
Today, there are even more participants involved in proof of concept (POC) and exploring ways to increase the efficiency of financial transactions.
According to David, one such place the market is seeking a solution is for a US Dollar leg for interbanking transactions. The timeline to settle trades between counterparties takes multiple days and includes a lot of manual effort.
David suggests that if one were to use a digital security like ArCoin as a proxy for that US Dollar leg, then one can implement a blockchain-based solution to achieve significant savings.
Elsewhere, digital assets financial services company Diginex and Itiviti, a technology and service provider to financial institutions worldwide, have unveiled a new front-to-back trading, portfolio, and risk management solution called ‘Access’ to allow investors to manage their portfolios using institutional technology that is tailored specifically for cryptocurrencies.
The cryptocurrency solution will enable the trading of cryptocurrencies and crypto derivatives across several platforms.
The launch of Access comes as institutional investors are making a wholesale shift into digital assets, driven by dwindling returns in traditional assets and escalating fiscal stimuli fueling the rising concerns about inflation, according to Diginex.
Other partnerships can be seen in the industry working towards creating a solution around digital assets too. For example, Thomas Murray has launched a new digital asset solution in partnership with Alphaplate, a crypto market-maker and proprietary trading firm. The partnership will assist institutional asset owners, fund managers and service providers to understand the capabilities and associated risks of trading and holding digital assets.
All of this indicates that transformation on a large scale is coming to the industry.
David comments: “Financial Institutions, Back End Service Providers, Trading Desks, Exchanges, and even DTCC have all been experimenting with distributed ledger technology and how they can improve their offerings. Blockchain technologies offer efficiencies that reduce cost, intermediaries/dependencies, and time. The holy grail for markets is an end-to-end solution that allows for straight-through processing from trade execution to settlement and clearing. It’s coming.”
With huge transformation and growth coming in this area, this market is expected to expand at a rapid pace.
While technology is already an essential part of a digital asset, industry participants are finding ways to improve their offerings in this space, and although digital assets have had its fair share of criticism, with some saying they can be used for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them, the opportunities of digital assets are being realised.
Indeed, some experts have given them praise for their portability, divisibility, inflation resistance, and transparency.
Speaking from a Singapore perspective, Alexandre Kech, CEO Onchain Custodian, says: “With regulation in place in most tier 1 financial centres such as Singapore, with mature and entre-prise grade infrastructures having been developed the last two-three years such as custodians, and with the economical and financial uncertainties due to the printing of money by central bank, we do see an increase of interest from institutional investors such as financial institutions and corporates.”
According to Kech, family offices and affluent investors are also now buying bitcoin and other digital assets as a way to diversify their portfolio.
Running alongside this interest in digital assets, regulators are starting to take it seriously. Kech notes that in Singapore, the Monetary Authority of Singapore has established a licensing framework for digital payment token service providers as part of the latest version of the Payment Services Act.
Meanwhile, other countries such as Malaysia or Thailand have also worked on ensuring actors such as exchanges or custodians are registered or licensed and treated as the financial institutions they are. Over in Europe, Germany is working towards implementing the Markets in Crypto Assets (MiCA) regulation.
“These regulatory regimes include requirements around the prevention of money laundering and financing of terrorism which leverages the transparency of blockchains and bank like transfer of beneficiary and ordering customer information,” says Kech. With growth in digital assets on the rise, innovation and technology is certainly bubbling in this area.
The importance of blockchain
Blockchain is an integral component of a digital asset. The system of a blockchain records information in such a way that makes it near impossible to alter or hack. It is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
Cryptocurrencies represent a new form of a digital asset based on a network that is distributed across a large number of computers. This decentralised structure can allow them to exist outside the control of governments and central authorities.
Blockchains, which are organisational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
Jerald David, president at Arca Capital Management, explains: “Blockchain is a distributed software network that functions both as a digital ledger and a mechanism enabling the secure transfer of assets without an intermediary.”
So in terms of whether any other technologies could be used as for digital assets to record and validate transactions, David affirms: “Digital assets only exist because blockchain is being used to record and validate transactions. There are several other technologies like Excel that can also be used to record and validate transactions, but in order for it to be considered a ‘digital asset’, it must use blockchain.”
Although limited to the blockchain, there are lots of opportunities associated with this piece of technology.
For example, Allfunds Blockchain, the blockchain technology arm of Allfunds, is set to advance blockchain technology for the fund industry with its new partner and ConsenSys, the Ethereum software company. The solution includes advanced privacy features that enable participants in a blockchain network to control who is allowed to see information, and what nodes participate in the consensus validation of data containing confidential information.
And Allfunds and ConsenSys aren’t the only ones, BNP Paribas has also recently made moves in this space with its collaboration with Eastspring Investments, the Asian asset management business of Prudential, and Singapore-headquartered fintech firm Hashstacs (STACS) to implement a blockchain-driven solution.
Also in this year alone, technology company n-Tier has launched a new consensus-based reference data blockchain solution. Using a private blockchain to establish a consensus across firms on key data elements, n-Tier says the new solution will reduce reference data management costs and errors.
The movement in this space indicates that blockchain technology is continuing to show its worth for opportunities and use cases.
“Our market is moving at a frenetic pace. Blockchain technology has the potential to change finance in every sense of the word. Here at Arca, we always say, what the internet did for information, blockchain will do for asset transfer. Blockchain will allow for instantaneous transfer of assets globally creating a more connected, faster, simplified and inclusive global financial system,” comments David.
David suggests this creates tremendous opportunities on so many levels and is a paradise for individuals and companies that want to shape the future of commerce, finance, payments, insurance and other industries.
The Arca US Treasury Fund is a great example of this. Arca started with the notion that they could take a traditional financial structure — a closed-end fund — and could enhance the usability of the structure by introducing blockchain, which resulted in a faster, blockchain-based and more efficient product.
“We have barely seen the tip of the iceberg in terms of how impactful blockchain will be,” David says.
But there are some drawbacks and challenges too, and although experts say blockchain technology is not a difficult technology to conceptually understand, traditional finance can be wary of new technology and disruption.
Therefore, David notes that a lot of education has to be done to get companies and investors to participate in a system using blockchain solutions and the processes need to be defined.
“One challenge this presents is that we are creating the rules as the technology is only being developed. Interoperability between blockchains remains an open question as does regulation and how digital assets will be governed has not been finalised,” David adds.
Opportunities and new solutions in the pipeline
There are a number of opportunities for the development of digital asset infrastructure that could have the potential to transform how financial transactions are conducted.
While financial services have been embracing blockchain for the past decade, early adopters included DTCC and ASX who announced their intentions to re-create their backend technologies dating back over five years ago.
DTCC believes it is key to foster industry-wide collaboration and aligning the technology with the core principles of mitigating risk, enhancing efficiencies and driving cost efficiencies.
Today, there are even more participants involved in proof of concept (POC) and exploring ways to increase the efficiency of financial transactions.
According to David, one such place the market is seeking a solution is for a US Dollar leg for interbanking transactions. The timeline to settle trades between counterparties takes multiple days and includes a lot of manual effort.
David suggests that if one were to use a digital security like ArCoin as a proxy for that US Dollar leg, then one can implement a blockchain-based solution to achieve significant savings.
Elsewhere, digital assets financial services company Diginex and Itiviti, a technology and service provider to financial institutions worldwide, have unveiled a new front-to-back trading, portfolio, and risk management solution called ‘Access’ to allow investors to manage their portfolios using institutional technology that is tailored specifically for cryptocurrencies.
The cryptocurrency solution will enable the trading of cryptocurrencies and crypto derivatives across several platforms.
The launch of Access comes as institutional investors are making a wholesale shift into digital assets, driven by dwindling returns in traditional assets and escalating fiscal stimuli fueling the rising concerns about inflation, according to Diginex.
Other partnerships can be seen in the industry working towards creating a solution around digital assets too. For example, Thomas Murray has launched a new digital asset solution in partnership with Alphaplate, a crypto market-maker and proprietary trading firm. The partnership will assist institutional asset owners, fund managers and service providers to understand the capabilities and associated risks of trading and holding digital assets.
All of this indicates that transformation on a large scale is coming to the industry.
David comments: “Financial Institutions, Back End Service Providers, Trading Desks, Exchanges, and even DTCC have all been experimenting with distributed ledger technology and how they can improve their offerings. Blockchain technologies offer efficiencies that reduce cost, intermediaries/dependencies, and time. The holy grail for markets is an end-to-end solution that allows for straight-through processing from trade execution to settlement and clearing. It’s coming.”
With huge transformation and growth coming in this area, this market is expected to expand at a rapid pace.
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