Nadine Chakar on the future of tokenisation
- Future of Finance
- Jun 4, 2024
- 38 min read
Updated: Jan 29
A Future of Finance Interview with Nadine Chakar, Managing Director, Global Head of Digital Assets at DTCC
With the acquisition in October 2023 of Securrency, a FinTech that specialises in the development of blockchain technology for regulated financial institutions, the Depository Trust and Clearing Corporation (DTCC) signalled the end of the experimental phase of its engagement with digital assets. That phase dated back to at least December 2015, when DTCC joined the Linux Foundation Hyperledger project. That was quickly followed by participation in the US$60 million Series A fundraising by Digital Asset Holdings in January 2016, and publication the same month of a white paper on blockchain that warned of the potential “generational disruptive force” of blockchain. DTCC has maintained its interest in blockchain ever since, notably via the launch in November 2021 of DSM, an infrastructure to support the tokenisation of privately managed assets. But the Securrency acquisition gives the clearing and settlement infrastructure the tools it needs to move beyond narrow asset classes and Proofs of Concept (PoCs) and Pilot Tests and actually build an open tokenisation infrastructure for the whole of the American capital markets: a blockchain platform, a tokenisation engine, a smart contract engine, a digital asset custody service, programmable token capabilities, off-chain storage of ledger data and digital identity information, and a set of tools to ensure assets remain compliant as they travel across the digital asset eco-system. The Securrency acquisition also brought to DTCC Nadine Chakar, a senior and experienced securities services executive with an attested appetite for innovation who had joined the firm as CEO only nine months earlier from State Street, where she was Head of Digital. Her appointment as Global Head of DTCC Digital Assets is a boost for those who believe that the key to unlocking the potential of tokenised assets is open infrastructure. To find out if those hopes are justified, read, listen or watch Future of Finance Co-founder Dominic Hobson interviewing Nadine Chakar.
Key Insights
Paradoxically, the simplest route to a decentralised, interoperable set of token markets lies through the provision of a centralised but neutral market infrastructure by a central securities depository (CSD) such as DTCC, because its functionality can be used by any market participant that wants to develop a product or service, provided they can meet the requisite standards.
Building an infrastructure of this kind requires collaboration between market participants but the model is the norm in the conventional securities and funds markets, where the clearing and settlement services provided by CSDs and central counterparty clearing houses (CCPs) are open to any regulated entity that can match the required operational criteria.
Such a market infrastructure will help the token markets grow less because it provides token manufacturing, issuance and settlement functionality and more because it provides resilience, safety and especially scalability, and it can provide the seamless connectivity with traditional markets that enables users to be indifferent whether an asset is digital or conventional.
Although digitally native tokens are superior to asset-backed tokens in terms of the value of the benefits delivered, and especially in cutting the costs of intermediary services, it is unrealistic to believe that the conventional markets can transition wholesale to digitally native tokens, so in the meantime the issuance of asset-backed tokens is at least a mark of progress.
One of the potential benefits of tokens is a reduction in compliance risk, because a combination of digital identities accessible through interoperable token platforms and coding of compliance rules into individual tokens limits the risk of an asset being mis-sold because it is not, for example, appropriate to the investor or the investor is sanctioned.
Tokenisation offers sell-side firms such as custodian banks cost efficiencies and enhanced controls and lower costs of cash and capital while asset managers gain increased revenues from launching a great variety of products at scale plus the ability to distribute them to new classes of investors in sizes that are affordable lower down the income scale.
It is more difficult for the sell-side to progress tokenisation than the buy-side because banks are large, heavily regulated organisations with established client bases and stable profits, and the returns on the investment are distant, whereas asset managers are nimbler, readier to take risks and currently under revenue and margin pressure but need infrastructural support.
The benefits of tokenisation are real but it could take years or even decades to realise them at scale, so it is vital to maintain the trust and confidence of shareholders through the investment period, via a consistent, well-communicated focus on the end-objective and demonstrable progress towards it by delivering successful projects that create a sense of momentum.
DTCC, in conjunction with Citi, Wellington and Wisdom Tree, recently completed just such a successful project by proving that smart contracts could automate a transaction in which a Wellington private equity fund tokenised by Citi could be used as collateral for borrowing shares in a Wisdom Tree money market fund using DTCC Digital Assets infrastructure.
The opportunity to cut the cost of securities financing by using tokenisation to mobilise collateral that is otherwise unavailable due to infrastructural constraints cannot be realised by closed networks of collateral givers, receivers and agents but only by an infrastructure that is open to all market participants and indifferent to which entity tokenised an asset.
Solutions to the lack of inter-operability between blockchain protocols and between them and traditional markets, such as bridges and “unified ledgers,” are complicated by the need for tokens to remain compliant everywhere and the continuing proliferation of Layer Ones, which means blockchains will never resolve by consolidation into a single winner-takes-all provider.
Institutions that use regulatory uncertainty as an excuse for inaction are exaggerating the height of the obstacle since the experience of Securrency and Wisdom Tree (in launching a tokenised mutual fund) and major fund managers (in securing authorisation to launch spot Bitcoin ETFs) shows that engaging with and educating regulators produces results.
The concern that FinTechs are going to disintermediate existing service providers is also misplaced because the FinTechs cannot achieve change unaided but must collaborate with established banks and financial market infrastructures to make progress in ways that comply with existing regulations, and established institutions should respond creatively to that need.
The DTCC tokenisation strategy is not to compete with the users of DTCC services but to provide a resilient, safe, compliant and scalable infrastructure that enables the users to develop their own business models and compete with each other without having to duplicate investment in the functionality they need to issue, safekeep and settle tokenised assets.
The immediate priorities for DTCC are a follow-up to the joint paper published with Clearstream and Euroclear in September 20231 (which argued for infrastructure as crucial to scale and commercialise digital assets) and a broadening of participation in DTCC Testnet, a collaborative platform for market participants to test blockchain applications.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Nadine Chakar, managing director, member of the executive committee and global head of digital assets at DTCC, the post-trade infrastructure for the American capital markets. Nadine joined DTCC in December 2023 with the acquisition of the digital asset technology vendor Securrency, where she was the CEO. She was previously head of digital at State Street, where she also served as global head of markets, which she joined after holding senior management roles in the asset management arm of Canadian insurer Manulife and global custodian bank BNY Mellon. Nadine’s new role at DTCC has put her in a privileged position to shape the transformation, through tokenisation, of the operating models of every participant in the American capital markets and beyond. And that is what our conversation today is all about. Nadine, thank you very much for sparing the time to be with us.
01:16 Nadine Chakar: Dominic, thank you. Thank you for having me. And it’s really good to see you again.
01:23 Dominic Hobson: I’d like to begin with a quotation from you. Two and a half years ago, back in September 2021, you very kindly came to a Future of Finance webinar on the future of securities services. And in that webinar, you warned financial market infrastructures [FMIs] that, and I quote, `this ship is about to leave the docks here and they need to jump on board. If they enable our transformation, we will wholeheartedly embrace them, but we can’t let them slow us down either.’ Do you think the DTCC was listening to that webinar?
01:55 Nadine Chakar: Got to be careful. Like, in this digital age, everything comes back to haunt you. I think so. And in fairness to DTCC, and other financial market infrastructures, they’ve all been on a journey. I actually think DTCC had really kicked off their digital experimentation much earlier than that in the 2016 timeframe, give or take. But, Dominic, I think from the position I was sitting at before, we all tried to experiment, right? So we all set up digital groups, we all did our PoCs [Proofs of Concept], and that goes across Wall Street and across the world. The funny part is now, as I look at this, and I was at a McKinsey forum a couple of weeks ago, where they were talking about interoperability and they were talking about this and that and the other thing, and I just looked up and smiled, and it just dawned at me at this point in time that the route to salvation, if you will, the route to really getting to decentralised market infrastructure is actually through a centralised CSD [Central Securities Depository], which is DTCC. Over the past couple of years, we’ve done a lot of innovation by press release, right? We did something, we issued that press release. But you look into this a couple of years later, we’ve made good progress, but it’s just not enough for the size and the complexity of the industry that we work with. And looking at it from a different angle right now, from a DTCC angle, and actually I had a very large client, a very large player on Thursday, who said to me, `If you guys can’t pull this off, then nobody can.’ It’s a direct quote. And the more I think and reflect and look at the role that DTCC in particular, but other FMIs [Financial Market Infrastructures] in the market, in the world, could do, I think that’s the push we need to move forward. So I would like to think they were listening. I would like to think that we were able to influence where they were heading. I think Frank La Salla [President, CEO and Director of DTCC] and his team’s very courageous acquisition of Securrency sort of proves that, you know, they’re in it. They’re in it to really make an impact and move it forward.
04:16 Dominic Hobson: So given that paradox, the route to a decentralised infrastructure is …
04:21 Nadine Chakar: Isn’t that cool?
04.22 Dominic Hobson: Yeah, I like that. That’ll come back to haunt you as well. But also that challenge, that `if you guys can’t pull this off, no one can,’ in terms of concrete steps, what does that mean in terms of the sort of assets you’re looking tokenise now? What assets are we talking about?
04:42 Nadine Chakar: Yeah, that’s a great question, but I think that has mislaid the problem. We’ve been very focused on the assets, right? But I think we’ve missed a really important step, which is what I, what I aspire – I’m going to use the word aspire because I’ve only been here for a couple of months, so I still have a lot of consultation and approvals to get to – but for right now, the aspiration in the piece that we’ve all missed is really building a very solid infrastructure. DTCC and others are known to provide the infrastructure in the market for our capital markets today. And what is lacking is a similar infrastructure for digital assets, and that is key. So right now, my focus and the focus of our team in DTCC is to really collaborate with the market and start to build an end-to-end ecosystem. It’s not all going to be maintained and created by DTCC, but DTCC is going to provide that impetus, if you will, to start to bring the market together and then we’ll start to build there. And to your point, Dominic, I mean, I think from the assets it’s not going to be a surprise to anybody. We definitely believe funds and we’ve been very successful. And the work that we’ve done with Wisdom Tree Prime, for example, to show that you can tokenise ’40 Act [1940 Investment Company Act] funds and be very successful at doing that. You can tokenise money market funds, you can tokenise private assets. The tokenisation component, I’ve learned running Securrency for the time that I have, is not the hard part. The scary part is I can do it. You probably could do it with that ‘phone you showed me earlier. Tokenisation is not hard. What is hard is how does that then how do you embed that seamlessly into a legacy infrastructure which unfortunately we do need to maintain? It’s impossible to think in the near future that 100 per cent our assets will get digitised. So you still need to have a balance between the old and the new. You still need to risk manage that really well. And most importantly, you can’t lose track of the client experience, right? So that’s why the infrastructure component is really important and that’s where we’re going to double down our efforts. And I have been calling on the industry and I hope, forgive me, because I’m going to do it again now, we shouldn’t be competing on infrastructure. Nobody wins on infrastructure. You need scalability, you need resiliency, you need safety. And this is where there’s safety in numbers, with all of us collaborating. Once we get that infrastructure done, then go out and compete on the strength of your ideas, compete on the features of your product. And that’s where I’m hoping that DTCC will lead in that area. I hope I answered your question. I know I went on for a while.
07:34 Dominic Hobson: No, you have. I’ll drag you back to the assets in a moment. Before I do, I’d like to just try and tease out a bit more on that point you’ve just made about we mustn’t compete on infrastructure, this must be a public infrastructure. In terms of what that will actually look like, are we talking there of a genuinely public infrastructure? In other words, it’s open to all. It might be user-owned, it might be user governed, but this is a kind of layer, a foundation on which lots of different firms who compete with each other would seek to develop products and services. But you’re providing that fundamental layer on which competition could take place. It’s like the Internet for the tokenised markets.
08:14 Nadine Chakar: It’s like the Internet, but we’re not, we don’t have an Internet, we don’t want to build an Internet. But if you look at what we do today.
08:22 Dominic Hobson: I just meant by that it’s open and anyone can use it.
08:25 Nadine Chakar: We want it to be open. I mean, don’t forget again, it’s a very highly regulated industry so it’s got to be open within limits and within the constraints of the legal and regulatory framework. And as long as we’re playing in that box, and people can hit these high standards, then all are welcome. It’s the same concepts that we have at DTCC today, right? Like if you are, you reach, you hit certain criteria, you’re welcome to come in and clear through NSCC [National Securities Clearing Corporation] or be a member of FICC [Fixed Income Clearing Corporation]. We’ve helped. We’re moving the industry forward with T+1[settlement on trade date plus one day]. We’re doing treasury clearing, which we’ll hit in 2025. So we have been at the service of the industry since our inception. I mean, Dominic, remember 55 years ago it was the Wall Street firms that actually created DTCC, right, to deal with the paperwork crisis at the time. It was DTCC that moved the industry forward through electronification of securities. And it’s going to be, I hope, DTCC again that’s going to move the industry forward with digital infrastructure. So the concept right now is – but I’m going to qualify it, it’s a qualified `yes,’ because there’s a lot of homework that needs to be done. We are working with a lot of partners right now to sharpen that offering. Like everything else in life, it will evolve. But we’ve got to start somewhere. We need to get people to work together. And when you think about it, who has … I mean, we are the market by definition, right? Which is a pretty cool position to be in. We have the trust of our clients, we’ve got the trust of our regulators. And by bringing all these parties together to work together towards a common cause, a common good, I think we can build that infrastructure and with the hope, very securely and within the realms of regulations that we have, to start to see more velocity of adoption. Because there’s a lot of goodness in this technology and it’s not just tokenisation, it’s the whole digital experience that could be good for people across the board. That’s what we’re aiming to do.
10:31 Dominic Hobson: I think you’ll enjoy the cover story in the next tokenisation guide we’re publishing. It might even come out as early as today. But I’ll make sure you see that because I think it will resonate with you.
10:42 Nadine Chakar: That’d be great.
10:43 Dominic Hobson: I promised to drag you back to the assets and drag you back in a particular way which is this: There is this debate in the tokenisation industry, if I can call it that, between digitally native assets and asset backed tokens. And my reading of this is that DTCC is pretty clear that digitally native issuance is the desirable end-state for the token markets. But you still think that tokenising existing assets is worth doing because it will yield concrete benefits. My question is, do you ever worry that the current focus on asset backed tokenisation, and that’s overwhelmingly what the tokenisations that have been done so far actually are, do you think that is going to disappoint because you don’t get all the benefits you do from. Is it going to disappoint people so much that it will inadvertently undermine the case for tokenisation in general?
11:34 Nadine Chakar: That’s a great question and I personally don’t think so. I think what … We need to crawl before we can walk and this is a massive market. We can’t just toss out, like, I don’t know what the size is these days, it could be US$70 or US$700 trillion, whatever. It’s a big number. So what we would like to see … So tokenising real world assets, as people call them, I think is important and I think we have been able to prove through the work that we’ve done with Wisdom Tree that there is goodness and there’s benefits. The issue itself – and I’d love to see more native issuance, because you’re absolutely right, I think there is a multiplicative factor of benefits that come there – but, Dominic, the issue that I’ve seen in the work that I’ve done prior to my arrival here is you can’t just tokenise something and then sprinkle a little bit of pixie dust on it and hope that it’s going to yield, it’s going to yield something amazing. There is work that needs to be done in terms of the operating model, the business model of the issuer of these new tokens. And I apologise for going back to Wisdom Tree Prime, but they’re the only people, the only firm that I’ve seen that have had the courage of their convictions and they have their business right, which is Wisdom Tree. They’re a large provider of ETFs [Exchange Traded Funds] and they’ll continue to compete and go out and grow that business. But then they also opened up Wisdom Tree Prime, which is a different model. They moved away from manufacturing asset management product to becoming a distributor of asset management products. They’ve widened their revenue stream. So they’ve had the courage to modify their business model to make sure that this new technology yields the benefits that it can. But I’ve gotten a lot of calls from people going, `Nadine, like, fine, we’ve tokenised this money market fund, but it’s expensive because I’ve got to pay the current custodian, I’ve got to pay the digital custodian, I’ve got to pay the current TA [Transfer Agent], right?’ But to push it forward, use it as collateral, use it for capital efficiency gains, means to be able to move your model forward. That’s where you’re going to get that goodness. So you’re absolutely right. If on a scale of one to ten, digital issuance will get us to ten but, listen, if asset backed tokenisation gets me to six, that’s a win, Dominic, right? It helps us move forward. Don’t forget, innovation is something that evolves, not over days and weeks, but it’s decades and centuries in the making. So we’ve got plenty of time ahead of us. But if we don’t start to make a dent in moving forward … So I don’t believe it’s wasted. There’s a lot of education that needs to happen, there’s a lot of infrastructure that needs to be built, and we need people to feel comfortable using these assets. So investing in education and showing people the goodness of this technology is important. And that’s, again, at DTCC, it’s part of our mission to try to do that.
14:38 Dominic Hobson: Back to what DTCC can do to help. You were CEO at Securrency. It’s now part of DTCC, and it brings with it – and you were talking about this a minute ago about how easy it is tokenise things – but it does bring to DTCC all those token capabilities. It’s a blockchain platform. You’ve got a tokenisation engine, a smart contract engine. You can do digital asset custody, programmable tokens. You can store data on and off chain. It’s got digital identity and compliance tools, so it’s a full toolkit for running a token business. I just wonder how close the fit you’ve found since you arrived at DTCC between the tools which Securrency has and the user base – the people who use, the firms that use DTCC today. Is there a strong alignment there?
15:33 Nadine Chakar: Dominic, it’s been amazing. Like, even you mentioned a lot of the firms that I worked at before. This trumps them all in terms of access, not just in the US, but around the globe. I would also tell you that, since we announced the deal, the level of enthusiasm within our client base is off the charts. We have been working in partnerships with our clients since literally the first day we announced the deal. And as I told you earlier, one of our, a very large client, massive in the US market, said to me, `We were ready to give up on this whole idea of tokenisation until you guys came along.’ So I think it’s renewed now and that creates more pressure on us. Actually, I bumped into Frank [Frank La Salla, President, CEO and Director of DTCC] this morning grabbing a coffee and he’s like, `Nadine, I know it’s only been four months, but we’ve got to move forward.’ So the good news is, you know, at the leadership levels at DTCC, there’s this level of urgency that’s there that we need to start delivering for our clients. We want to do this in partnership with our clients. And the beauty of DTCC, Dominic, is yes, you’re absolutely right, we do bring … We’re probably one of the very few end-to-end infrastructures for capital markets. We don’t, we’re not attached to any L[ayer]1s, right? So we actually do sit on top of any EVM [Ethereum Virtual Machine]-compatible – an Ethereum Virtual Machine compatible structure – and that allows us the unusual nimbleness to be able to work with clients, whether they want to go this big into tokenisation and digital or this big. We can work with them to get that done. But with that too, and that’s really important, which you don’t get in a FinTech set-up, is you’re getting resiliency, you’re getting scalability, you’re getting safety, you’re getting financial safety. You don’t have to worry about us being around in 18 or 24 months. So it’s given the markets great confidence that DTCC is really starting to look forward. We can afford to look forward in this situation and we’ve just got the connections and the backing of our clients, if you will, to build the infrastructure we talked about a few minutes ago.
17:59 Dominic Hobson: I’d like to pick one thing out of your toolkit, which is digital identities. It’s surprised us at Future of Finance that the industry isn’t much more enthusiastic about this. Given the huge sums of money being spent on customer onboarding, the KYC [Know Your Client], the AML [Ant Money Laundering], the sanctions screening, the countering the financing of terrorism [CFT] – it’s a massive cost running into probably hundreds of billions on a global scale. I’m surprised that digital identities aren’t being adopted wholesale as a kind of solution to that. But anyway, I have the impression that DTCC Digital Assets is very enthusiastic about digital identities. So what part do you think DTCC can play? And I guess this applies to any CSD on the planet, in fact. But talk about DTCC. What part can you play in helping the industry to adopt digital identities?
18:48 Nadine Chakar: It’s early days, right? Because it’s got to be done within the confinement of the partnership with regulators here. The infrastructure, Dominic, has already been built. And Dan Doney, our founder at Securrency, he currently serves as the CTO [Chief Technology Officer] of DTCC Digital Assets,.like since day one, RegTech, as he calls it, regulation technology, has been his focus. And from the first day I met him, I can’t tell you how much money we spend and how much of our resources go to the underlying, to the most lower denominator here when it comes to compliance, when it comes to identity, when it comes to being able to provide ultimate security around know your client and AML. Now, we don’t do that, right, but we create the infrastructure and the tools for other banks to be able and other providers to be able to do that. And even as CEO of Securrency, I would argue with him, like, `Dan, why are we doing this?’ And he keeps going. That is fundamental. And it’s true, we were one of the very first to put out a token that is based on something called the compliance aware token framework, which is in my very technical terms, you put the systems in the token. Now, Dominic, when you and I were growing up in this industry, you’ll remember we used to have a system for equities and we had a system for fixed income and one for derivatives because we couldn’t handle the intricacies of the various asset classes. With this compliance aware token framework, you’re actually starting to put the rules in there. And on the digital identity it will know Dominic is only allowed to trade equities between eight and nine o’clock and he can only – I’ll make it up – can only trade the S&P 500. So at this level, it is more of a dynamic identity and compliance framework. A lot of people today rely on whitelisting for a lot of this. Whitelisting is done like in one point in time, but it’s hard when that token starts to move ownership, you sort of lose track of it and you got to do it over and over again. The compliance aware framework actually keeps track of where that goes. So it’s a very important, like our entire platform, if I like, and you kindly read off the stack earlier, but our stack sits on its compliance first. And when you talk to DTCC, that’s the thing that attracted them most about Securrency. It’s compliance first, then it’s a harmonisation, integration layer, then it’s data, then it’s the smart contract composer that sits on top of it. So everything that we do has been based on compliance first. We will continue to partner with the industry around digital identity, zero trust, all that good stuff that would help us make it a more secure and resilient environment. So we tend to lead there. We intend to partner. We intend to invest. We will do what it takes to make sure that the integrity of that market is beyond doubt, because we also believe that would help give regulators peace of mind. It will give clients peace of mind, and hopefully it will push with adoption moving forward as well.
22:04 Dominic Hobson: It’s an interesting insight that the existing traditional industry silos are an obstacle to the adoption of digital identities.
22:14 Nadine Chakar: It is because there’s no interoperability, right? We all throw that word out like it’s, you know, it’s, you’re at a cocktail party, you throw ‘interoperability’ and you sound really knowledgeable, but the fact of the matter is you can’t cross the silos. So what we do have is an industry of, you know, we have a lot of these walled gardens, as they call them. They’re filled up pet rocks. And as long as you and I share a garden, we can trade, but you can’t cross to your neighbour’s wall and do that. And our intent is try to figure out a way, using technology, in using the existing rules and regulations that we have, to break down those silos.
22:54 Dominic Hobson: I’d like to ask you about differences between the buy-side and the sell-side when it comes to tokenisation and to recall your experiences as head of operations and data at Manulife. You were there for three years. You also got to know a lot of asset managers when you were running asset servicing in Europe for BNY Mellon. You’ve picked out an asset manager earlier in our conversation today. I just wonder what your view is: Is the buy-side more excited about tokenisation than the sell side? And the reason the buy-side might be excited is that obviously it’s not a great time for the industry. Their margins are under pressure. Do they see this as a way of cutting cost? Point one. Point two – do they see this as a huge opportunity to create new products, new revenue streams, which can help them to start growing again? So I wonder what asset managers think. And I also wonder what the sell-side thinks, in your experience. By sell-side, I mean primarily global custodians and fund administrators rather than investment banks. So what’s the balance between buy- and sell- side in your experience?
23:57 Nadine Chakar: So let me start by saying, for me, when I look at not just tokenisation, but the entire digital ecosystem, for me, it provides benefits to both the buy-side and the sell-side, as you’ve defined it, on both sides of the ledger, right? On one side it could provide with more cost efficiencies and that comes with it a lot better controls and less manual work. And capital efficiency. Capital efficiency is really important, especially in this day and age. Capital and cash isn’t cheap anymore, so it comes with a lot of strings attached to it. And then the other side of the ledger, to your point, it does create more revenue sources, the ability of manufacturing and launching products again at a scale and a rate that we’ve never seen before. And I’m going to put a little footnote too, that a lot of people are attracted to digital technology because they think, and I believe that, that it opens up and makes finance more accessible. We’ve talked a lot about, as a group, we talk a lot about the unbanked. There’s 1.7 billion people in the world that don’t have bank accounts. But this technology will make it more affordable to people to be able to leverage the skill sets of professional money market money managers that historically have been out of reach for individuals. So when I look at the buy-side, to your point, they are excited, they’ve put more money, they’ve done more that I’ve seen across the board. But they can take it so far without creating an environment that helps them grow and get benefits from their infrastructures. On the sell-side, as you call them, the custodians, there is, listen, custodians are big organisations, same thing, they’re highly regulated, they’ve got to take their innovation at a more measured pace. And we’ve seen some be able to push out more than others.
26:05 Dominic Hobson: As you say, innovation budgets are not unlimited. Innovation takes time. What incentive do you have to build things that your grandchildren will enjoy? But you’re still under pressure to show something tangible. Not just you, but your clients …
26:20 Nadine Chakar: All of us.
26:22 Dominic Hobson… all of you. And throughout your career, you have always made clear that you measure success in terms of higher revenues, savings, increasing those margins, making the business more profitable. How easy is it to apply those career long criteria in an industry which is nascent, like digital assets?
26:40 Nadine Chakar: I think the same principles still apply, Dominic. If we can’t do all this, then there’s no point investing the time, money and energy to do that. If this is a matter of just satisfying our curiosity for something nice and new and shiny, then we can do that in the background. I really believe with every fibre of my body that once this technology is deployed at scale, all the goodness around cost savings, new revenues, capital, efficiency, new products that are accessible to people of all walks of life would be a reality. But it’s going to take time. And in order for us to be afforded that time, we need to win the trust and confidence of our shareholders that are paying for all this innovation. And we can reward them by showing, by being very clear on the mission, showing step-by-step success. And it’s been my experience that if you show them what the end-goal is, they will come along with you on that journey. But I think transparency is key, communication is key, collaboration is going to be key. But most importantly, get very locked on the end state-and [do] not get distracted. The beauty of .. It’s funny, I’m working on a speech that talks about how technology has impacted finance. And there used to be, once upon a time, like when you came to finance, you needed to know your formulas, your RoIs [Return on Investment], your profit margin. Right now, you got to know your bits and bytes as well as you got to know your … So you’re seeing that blending there and that’s the new finance of tomorrow. So what we’re doing very much is part and parcel of that. But it’s important to remain focused, clear on message and deliver. Like the delivery has been key. And I don’t think we’ve delivered enough for the hype that we’ve put in this marketplace. It’s the unfortunate reality. I mean, there’s more. I can’t keep up with how many conferences we have. Actually, I’ve had a buy-side client reached me yesterday and in the text they said, `Listen, we were sitting yet on another panel on tokenisation and it’s getting old.’ So there’s a bit of fatigue there from just talking. And this is where I think the DTCC acquisition of Securrency is really a call to action. Let’s get together, let’s crack this nut and deliver something tangible to the market.
32:38 Dominic Hobson: Now, talking of delivering something tangible, making step-by-step progress, as opposed to a phrase you used earlier, I did see a press release from Citi about a Proof-of-Concept [PoC] they’ve done with you at DTCC, but also with Wellington and with Wisdom Tree, in which smart contracts were used to automate all stages, including settlement, of a securities financing transaction. In other words, this Wellington private equity fund, tokenised by Citi, was used as collateral for borrowing a Wisdom Tree money market fund. Can you tell me a bit more about this Proof-of-Concept? And the reason I’m asking you about it is because repo, securities lending, collateral management has been identified as an early use-case for tokenisation. I wonder if DTCC see this as a major opportunity in the tokenisation area, in much the same way as HQLAx and Broadridge have done.
33:35 Nadine Chakar: Very much so, Dominic. I mean, you articulated very well the outcome of that Proof-of-Concept [PoC]. And I’ll focus on the last component that you talked about. So were able to show we’ve got an amazing tool in our toolkit. It’s called “Composer.” What we set out to show is, using smart contracts, you can automate entire financial services transactions or infrastructure. So what we set out here to do is we showed that you can actually automate pretty much every single aspect of the securities lending process. We showed that we’re actually not fussed who tokenises the asset. So as you saw in this situation, it was Citibank that tokenised, but they used our tools to be able to take the new asset and use it as collateral in a securities lending transaction. And so we believe that what we wanted to show … For us, it was important to be able to validate that everything that we built actually works in real life. So we did that. And now the next step of that is, to your point, is we’ve had, and we continue to have a lot of dialogue within the industry about how can you now tokenise collateral in a way that makes it more efficient, both in terms of capital and cost? Now, the problem with collateral, Dominic, and you and I have been around for a while, you remember Lehman and how hard it was to, like, track where all [the assets were] So the problem we have here is that it is untested in terms of law and regulation. What happens during time of stress in bankruptcy around collateral. That is one of the bigger problems that at least I have with how to … So we are engaged with industry associations, with other large buy-side and sell-side providers to see can we build something that’s robust enough. And to your point, J.P. Morgan has done a lot of work on repo, on Onyx [a blockchain platform owned by J.P. Morgan], so has Broadridge, so have others. But, as I said earlier, they’re done in their silos. And can we now break those silos and bring it all together? So I’m not looking to reinvent the wheel as much as really like opening up in an environment where that collateral could be a lot more free flowing in terms of … So liquidity is going to become even more pressing as we move forward. You got T+1 [settlement on trade date plus one day] now. The cycles are shorter. You’re going to have more clearing that occurs in the future. So looking how efficiently we can do collateral, cross-margining, all that stuff, is critical. And again, it’s not to the benefit of DTCC, it is to the benefit, not only to the benefit of DTCC, but to the benefit of the industry. And we’re working together across the board. So we will continue. Obviously you still have to do PoCs [Proofs-of -Concept], right? You can’t go in and bet the farm on something when you don’t know it works. But that work with Citibank was really to showcase that the DTCC platform is open. We don’t care who tokenises, we don’t care what token formats you use, we don’t care what smart contracts you use. And that gives a client indefinite choice. You want to use an open-source format, go for it, if you like those pieces of it. But our ability to collate it all together and be able to create something that’s automated from beginning to end is priceless. And then think about it in terms of regular securities. A smart contract does allow you to automate the entire lifecycle of that trade, from dividends to corporate actions to proxies. Think about how many people today and how much energy sits in the back, middle and back offices, that are doing this type of work, where a lot of this stuff could be automated and that human capital can be deployed to do different work, if you will, in these environments. So that’s the promise of this technology. And that’s why the Citibank PoC was very important to us.
37:54 Dominic Hobson: I’m going to have to ask you about interoperability, which you … we’re going to throw this out at cocktail parties, as you said. I think you and I both do that. I’m not sure how many other people do. But anyway, obviously digital assets issued onto these blockchain networks are going to exist alongside traditional assets on old-fashioned infrastructures for quite a long time. But people will want to port their assets between these different networks. They’ll want to transact between these different networks. So what is the solution to the interoperability problem? Is it things like standards, a SWIFT equivalent in the digital asset space? Or is it this idea which has emerged from the BIS [Bank for International Settlements], the Regulated Liability Network [RLN]? The IMF has picked it up. You know, this unified ledger, this network of networks, or single programmable platform where everything can be done, tokenised and transacted in and ported in a standardised fashion. What’s going to enable that interoperability so that the buy-side and the sell-side can be indifferent about where an asset is?
39:04 Nadine Chakar: It’s a multifaceted answer in one. Honestly, that’s still in progress. Standards are important. And again, DTCC, in partnership with Euroclear and Clearstream, we’re working through the next instalment, if you will, of the first layer of standards that we introduced back at Sibos last fall.
39:28 Dominic Hobson: This refers to the paper you put out with Euroclear and Clearstream.
39:32 Nadine Chakar: We are working on a follow-up to that paper. Hopefully that’s going to come out soon. I think we’re targeting either Q2, Q3, so it’s coming out soon, but that work continues. As you can see, we’re doing it in partnership with the large ICSDs [International Central Securities Depositories] so we can cover as much ground as we can. I don’t … I personally, this is my personal belief, I don’t believe there’ll be a winner- takes-all. So when people talk about the network of networks, I don’t honestly believe that’s possible. It goes back more to your analogy of the Internet, Dominic. Behind the scenes, there are many layers that make up the Internet. There’s also a popular analogy that runs in the circles here. It’s the telephone networks. You’re on AT&T in the US, you get to the UK, you’re on O2, you go to France, you’re on Orange – and it works, right? So we need to figure this out. The problem today is we do have bridges and layers and all that stuff, but they’re also not secure. If you look at where the weaknesses come in and where the hacks occur and where people start screaming that the technology isn’t … It’s those chains that tend to create some of that weakness in there. So I think there’s more work to be done. And I don’t. I also, the … The technology is so nascent, Dominic, that I don’t even know if the L[ayerl1s that are in flight today will be here tomorrow, right? Because there’s always going to be this next young person that’s going to come in, that’s going to put something that’s better, faster and cheaper on the market. I know for a fact there will never be a winner-take-all. So we know that. We also notice too much of everything. So there’ll be need to be, there’s going to be a bit of consolidation. And I don’t think the right answer has been invented yet. And so there’s a lot of hypotheses out there. And, listen, they all make a bit of sense, but the scalability that we need … Is that the right answer for … [It] is really the sequel. It’s like a movie you did, part one, part two, part three. Is that really the answer, or is it really building something new that’s going to bring it all together? So I think there’s something there with the telecom[munications] industry and the Internet that we’ve got to look at a little bit closer. But I don’t have the answer for you right now. Part of it is also compliance. Compliance needs to be at the heart of this stuff as well, because unlike a SWIFT message that goes from you to me and vice versa, these tokens can go anywhere in the world, right? That’s the beauty of the Internet. That’s the beauty of blockchain. It’s [that] these tokens can go anywhere and you have got to be able to keep track of them. They need to get to the right destination. So I think there’s more work to be done. I don’t think anybody’s found the right answer to it, but we will continue to work and engage with everybody until we get there.
42:39 Dominic Hobson: Can I just pick you up on that point about compliance? Because regulation is obviously an enabler here, but it’s also a brake on progress. And I’m thinking here particularly of Gary Gensler’s [Chairman, Securities and Exchange Commission] activities against cryptocurrencies from his position at the SEC [Securities and Exchange Commission], which I imagine creates a degree of confusion in the minds of people. So how would you suggest that the people who want to pioneer tokenisation should navigate that difficult balance between, obviously they want to remain compliant, but at the same time, they are not quite sure where the compliance line actually lies. Are we talking here about making these assets available only to qualified investors, for example? What’s the way to strike a balance between the need to innovate and the need to remain compliant, which you’ve referred to a number of times?
43:29 Nadine Chakar: Yeah, I mean our experience, Dominic, so far has been, and as you know in the US we’ve got many regulators that have different parts of jurisdiction over this technology, in these assets, right? You’ve got the CFTC [Commodity Futures Trading Commission], you’ve got the SEC [Securities and Exchange Commission], you’ve got the Fed [Federal Reserve Bank], you’ve got the OCC [Office of the Comptroller of the Currency] – I’m forgetting a few. But I’ll go back to our experience with Wisdom Tree. And this is where we were still Securrency, and not a part of DTCC. And the first authorisation to launch the first tokenised ‘40 Act [Investment Company Act 1940] fund. Now as you know in our markets here, a ‘40 Act fund is the most regulated fund that you can put on the marketplace. It took us maybe two to three years working in partnership with the SEC and we got there, right? Part of it was educating them, part of it was listening to what their concerns were. Then we went and did modifications to the platform to address these concerns. And I just lay all this … Now today when we launch a new fund for Wisdom Tree, it’s exactly the same time it takes to launch a normal fund. It’s the 75 days that usually you file and you do all that stuff. So that’s a long way. So this is my way of saying [that] there is a path forward and sometimes we use a lack of or murkiness of regulation as a crutch. But the fact of the matter is if you look at Blackrock and Fidelity, they got the spot bitcoin ETF approved. And all I’m trying to say is that, when we do partner with our regulators we listen to their concerns, we adapt to their concerns, and you do have success. Now, is it a lot more work than it needs to be? Maybe. But the fact of the matter is we get to where we need to be. And my objective here to the work that we want to do at DTCC is hopefully work with our regulators to get them more comfortable if you will, and for us to really test the hypotheses. We actually do have everything we need to be able to move forward and if we don’t, then we’ll work in partnership with them to get that done. So I think the regulation isn’t, it’s … Listen, it doesn’t make things easier, but it’s not the impediment that everybody hides behind. At least it hasn’t been my experience.
45:48 Dominic Hobson: So a bit more work to do I think to make Mr Gensler happy with those bitcoin ETFs – but you don’t need to comment on that.
45.55 Nadine Chakar: He approved those ETFs and that was great. He’s also approved the Bitcoin … the ‘40 Act. He’s also approved Franklin Templeton. So, they have … When we can get them comfortable with securing the safety of the end-user, I think they’ve moved forward. But it’s, you know, listen, our rules and regulations, Dominic, have been built over decades and decades, right? Like, to change everything else in a couple of years is also not reasonable. So we’ve just got to work with everybody. And this is why education and comfort, giving people comfort that we’re not doing things that are crazy [is important]. Listen, I’ll share this, and maybe I shouldn’t share this publicly, but as you noted, I’ve worked in the regulated financial industry for all my life. I was blessed to run, if you remember, our Dutch bank, our Belgium bank, our UK bank at the time. So there is, and I exaggerate to make a point, but there’s a concern that when FinTech comes in and there’s a lot of rhetoric like FinTech is going to, they’re going to take out the banks and they’re going to take out CSDs, right? The fact of the matter is, and I think reality has shown, that FinTechs alone can’t do anything. And the bigger, larger regulated institutions need a little bit of creativity and oomph to it. And it’s proven that when you bring both parties together, you move forward, which has been helpful. And again, hence the secure Securrency-DTCC combination. So that’s been helpful. And then old dinosaurs like me that have the framework, of that control regulatory framework, bringing it into a FinTech environment has also been very helpful to give people confidence that we’re doing things the right way, we’re building it right. We’re being in compliance, we care about regulations deeply and we want to make sure that whatever product we put on the market, it’s more good than harm. It goes beyond that. It’s do better as we move forward. So it’s going to take time. We can’t throw out 40, 50 years of regulatory framework over two to three years. Other countries have done it, but other countries don’t have the size and scale that you have in the US capital market.
48:18 Dominic Hobson: You know, you have spent your life inside regulated institutions, but also institutions which have to compete. You’re now inside an organisation which is the key infrastructure for the American capital markets. It’s a kind of user-owned, user governed model. It’s enabling other people to compete. So it’s going to be culturally different from where you’ve spent most of your career. And I think you’ve answered this question, but I think you’re saying that the great thing about DTCC is it’s in a very powerful position to make things happen in tokenisation in a way that these closed networks – you refer to that as well; if you’re J.P. Morgan, you want to keep the assets and the transactions in your own network, you don’t want to share them with people – [cannot]. So am I right to think that you’re glad to be at DTCC because you want to make things happen here? And actually you’re in a very good position to do that because of the nature of DTCC itself.
49:10 Nadine Chakar: You’re spot on, Dominic. When I took over at Securrency, it didn’t take me long to realise that our ambitions to change the world [would be hard to achieve]. When I would sit down with Dan [Doney, Founder of Securrency] and we would think about how our technology would change everything, it was very short in my tenure that I realised that alone, despite the fact that we had phenomenal technology, it would have been very hard for us to make the dent, and even if one of the big custodians launched our platform. Being at DTCC, it’s, you are the market, right? And our mission here is to really help our clients move forward through the strength of technology, which is exactly … And I may be butchering the vision a little bit, but I’m close enough … The intent here is we want to partner with our clients, we want to enable their business models through technology. This is the perfect mix. But I’ll also tell you, within DTCC itself literally we’re getting, you know, I’m getting an outreach from the, from the teams within DTCC, right? Like the teams that process all the ETFs [Exchange Traded Funds] in the marketplace or the private markets or do the clearing. And they’re all very excited to figure out how this digital technology can be embedded in their own businesses today. So they ask as well [whether we] could embed, empower their organisation to help their clients. So I am super-excited to be here, Dan and the entire Securrency team, because we finally fulfilled our dream and our ambition to be able to change the markets for generations to come if we’re successful. I have been overwhelmed with the warmth and the enthusiasm of the DTCC. I think you called them lifers or long-timers but they have embraced this technology at a scale that honestly I was afraid that we would be actually a foreign body coming in. But no, they’ve embraced us very warmly and they’re looking to use this technology right now to be able to modernise their own offerings to their clients. So I will close where I started. If we can’t pull this off, then nobody can. And when I look at the commitment of our board, our executive management team and all 5,000 people at DTCC, and I’m not exaggerating, the amount of support we’re getting is just off the charts and I think that is good news for the industry, our industry at large, not just in the US but I think across the globe. And I think it’s great news for the promise of this new technology. We’re all in it together. We are going to give it our all and I do hope that the industry will heed our call and come to collaborate. Listen, there’s going to be competition. That’s always the case and we love it. But I think also a good dose of collaboration is what we need to take this over, to take the hill here, and I know we can. So that’s our hope and ambition. And I don’t know, maybe next year you and I could touch base again and see how close we’ve gotten.
52:26 Dominic Hobson: We will definitely do that. Just one final question for you, Nadine, just looking forward, what would you say are the priorities now you mentioned that you’re going to update the paper you released at Sibos last year with Clearstream and Euroclear. An interesting paper that expressed a degree of exasperation with the endless number of Pilot Tests and PoCs [Proofs of Concept] – that innovation by press release you referred to. And it also talked about interoperability, which we’ve touched on. Maybe the way to answer my question about what your priorities are is say what’s going to be in that paper?
53:02 Nadine Chakar: I can’t release what’s in that paper yet, but I think it’s a good continuation of further developing themes that we tease out in the first paper. So we’re in the mode of consultation right now with some .. like a good chunk of the industry. And as I said, I mean, we’re aiming to hopefully either in May or June, try to release it so it will open up a dialogue there. The second priority that I have is to start to release our products. So we will continue to market our products on a standalone basis, but now under the label of DTCC Digital assets. So we’re excited to do that. I know I’m going to eat my words right now, but we’re also looking at a couple of Proofs of Concepts [PoCs] that take the thoughts of liquidity and collateral and other things into consideration. And the last thing that I’m hoping to do at some point this year is DTCC had something called … They had a test environment where people could come in. It’s called Testnet. They used to come in and we would allow them, we would give them access to blockchain, a couple of tools so people could come in and experiment with digital technology to see if it was fit for their business cases or not. We intend to release something at a much broader scale. That would be something where, as an industry, we come in and work on common problems and try to solve them. So that’s part of the collaboration effort that I talked about. That’s still in the earlier stages of thinking through that. But hopefully we will have some news to share towards the end of the summer, early fall, as we make some progress with the other priorities first. But that would be the big reveal, if you will, to try to bring the industry together so we can deal with some complex problems, solve it once and for all, and start to open up the road towards adoption.
55:07 Dominic Hobson: Well, Nadine, I look forward very much to catching up with you again at the time of the big reveal. But for now, I’d just like to thank you very much for sparing the time to share all your experience, all your knowledge, all your ideas, and indeed all your enthusiasm with the members of Future of Finance. Thank you very much.
55:22 Nadine Chakar: Always a pleasure. Thank you so much. See you later.
