20/09/2020 by Future of Finance 1 Comment
HOW CSDS CAN FIX THE BLUE SCREEN OF DEATH THEY SEE IN FRONT OF THEM
A FUTURE OF FINANCE WEBINAR ON THE ROLE CSDS COULD PLAY IN DIGITAL ASSET MARKETS
4th December 2020 at 14.00 UK Time
Central securities depositories (CSDs) are in the front-line if, when and as the securities markets are transformed into digital asset markets. In theory, their core functions in issuance, settlement, registration and asset servicing can all be performed more efficiently by blockchain technology. But blockchain is also rich in opportunities for CSDs to accelerate the evolution of the digital asset markets by supplying a much-needed measure of trust. By adopting the new technology they can also enlarge the scope of their existing functions to encompass new asset classes and geographies. Pioneering investments, regulatory and central bank policy changes and secular developments in the capital markets are all conspiring to make a strategic decision by the CSDs more urgent. This Future of Finance panel explores the nature of the threat, the new possibilities created by blockchain technology, and what CSDs should do now.
Central securities depositories (CSDs) are threatened by blockchain technology. This is because CSDs are responsible for the issuance of securities (they are issued into CSDs, which check the number in issue matches the number held by investors), the settlement of securities transaction (by delivery of securities against payment in central bank money), registration of ownership of securities (CSDs maintain accounts on behalf of investors or their service providers) and the payment of entitlements (CSDs credit dividends, interest payments and other entitlements to investor accounts). And blockchain technology is in theory capable of fulfilling all of the tasks more quickly and at lower cost. It offers direct issuance into accounts on a single distributed ledger, direct settlement of transactions between accounts, simultaneous verification of transactions and registration of ownership, and direct and automated payment of entitlements to accounts (usually through smart contracts).
CSDs around the world are aware of the threat and some (notably ASX in Australia, but also Hong Kong Exchange, Singapore Exchange and SIX in Switzerland) are adopting blockchain technology. Many CSDs also foresee a future role for themselves in governing admission to private, permissioned blockchain networks. But so far the lack of trust of corporate issuers and institutional investors in the safety of assets issued on to blockchain networks; regulatory uncertainty over the legal and fiscal status of digital assets and the ability of blockchain networks to achieve final settlement of transactions; the lack of standards to facilitate inter-operability between blockchain networks and between blockchain networks and traditional trading, clearing and settlement platforms; and especially the inability to settle transactions in fiat currency on blockchain networks, has relieved most CSDs of any pressing need to adapt rapidly.
However, all these inhibitions on the use of blockchain as an alternative to traditional CSD services are gradually being lifted. Long established financial services firms (such as Fidelity, Standard Chartered Bank and SIX) are building convincing digital asset custody solutions that overcome the conflicts of interest and cyber-insecurity of the crypto-currency markets. Governments and regulators are writing and re-writing securities laws and regulations to ensure digital assets enjoy legal and regulatory certainty. Work is in hand on standards to make it easier for digital asset and traditional trading, clearing and settlement platforms to exchange information seamlessly. Above all, central banks have, in the wake of the Libra currency proposed by Facebook, accelerated their preparations to issue central bank digital currencies (CBDCs) capable of solving the absence of on-chain fiat currency settlement options.
Other factors are at work too. Investment banks and asset managers are looking to cut their costs. So they are putting the custodian banks, which have long acted as the gatekeepers to CSDs on behalf of buy-side clients, to achieve greater standardisation of exchanges with CSDs in different jurisdictions, lower prices for CSD services and a reduced level of risk for client assets held by CSDs. The weight of portfolio investment and flows is also shifting from the Atlantic to Asia, where legacy technology and established interests erect fewer barrier to the adoption of blockchain technology. So there are good reasons beyond the purely technological to believe the CSD reckoning with blockchain technologies cannot be postponed much longer. The panellists at this Future of Finance webinar will explore the opportunities that blockchain creates for CSDS as well as the threats.
Topics of discussion include:
• Sell-side and buy-side attitudes towards CSDs
• The vulnerability of existing CSD functions to technological disruption
• The motivation of the market leaders and pioneers in the CSD industry
• What CSDs users (both issuers and account-holders) are looking for
• The influence of CSD ownership over the willingness and ability of CSDs to act
• Whether domestic client bases retard progress
• Which jurisdictions are ready for digital asset issuance, trading, clearing and settlement in terms of law, regulation and taxation
• The structure and pace of a transition from securities markets to digital asset markets
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