Financial Market Infrastructures Press Their Case for Blockchain

Although estimates vary, asset tokenization is seen as a multitrillion-dollar business opportunity ripe for the taking by a financial industry becoming increasingly conversant with distributed ledger technology. It’s still early: A DLT in the Real World survey this year by the International Securities Services Association, supported by Accenture, Broadridge and Ripple, found 37% of participants actively using the technology, and 68% of initiatives turning over less than $10 million annually.

Maturation of DLT, or blockchain, depends on factors including liquidity, regulatory clarity, and robust underlying ecosystems. The last has seen a flurry of activity among a crowd of entrepreneurial digital-native custody and settlement providers, but it is one of the leading legacy incumbents prioritizing the forging of an institutional-grade future.

Depository Trust & Clearing Corp. has been investing in and trialing what it saw as potentially disruptive blockchain initiatives for most of a decade. Last September, the global industry-owned utility teamed with two other financial market infrastructure (FMI) operators, Euroclear and Deutsche Börse subsidiary Clearstream, on a paper calling for ecosystem collaboration, standardization and interoperability to overcome the limitations of siloed, subscale deployments with limited liquidity. (See Is Institutional-Grade Blockchain Ready for Its Great Leap Forward?)

A second DTCC-Clearstream-Euroclear document, Building the Digital Asset Securities Ecosystem, proposed six principles, ranging from legal certainty to operational scalability, “intended to serve as a roadmap for the industry to come together and develop comprehensive standards for the digital asset marketplace,” said their May 29 announcement.

Growth Prospects

The FMIs also recommended “controls to help firms mitigate risks such as asset mismanagement or insufficient controls to govern smart contracts,” and engaged Boston Consulting Group for “an analysis including reviews of approximately 100 regulations and white papers across multiple jurisdictions, and over 20 interviews with key market participants and technology vendors.”

A BCG-ADDX study raised high hopes with a projection that “the total size of illiquid asset tokenization globally would be $16 trillion by 2030.”

BCG’s tokenization growth path to 10% of GDP in 2030 (in trillions of dollars).

Says Beyond Asset Tokenization, from Northern Trust and HSBC: “We expect that by 2030, approximately 5% to 10% of all assets will be digital. Considering that global assets are expected to rise to $145.4 trillion by 2025, this is a substantial number, and it will only continue to increase as technological innovation drives change.”

A Standard Chartered-Synpulse paper on real-world-asset tokenization predicts $30.1 trillion by 2034 as the sector breaks out of its early concentration on traditional assets like U.S. Treasury securities and money market funds.

“While many firms recognize that blockchain holds enormous promise to deliver cost savings, capital efficiencies and reduced risk, the industry needs to pivot and demonstrate tangible results and value generation,” said Nadine Chakar, managing director and global head of DTCC Digital Assets since the company’s acquisition late last year of Securrency, where she was CEO.

“We have a unique opportunity to transform the financial system,” added Chakar, who previously headed State Street Corp.’s digital assets unit. “But it will require collaboration across a wide cross-section of firms to build the infrastructure, standards, controls and governance to underpin digital markets. We are proud to lead this conversation and will use this paper as a springboard to build consensus and drive efforts forward.”

Mutual Fund Service

Continuing to build on its record of digital asset “innovation and experimentation at scale,” DTCC released a report in May on the Smart NAV (net asset value) pilot, which it said “leveraged DTCC’s digital asset capabilities, as well as Chainlink, a leading technology platform for cross-chain interoperability, and blockchain abstraction.” It was described as an exploration of an extension of DTCC’s Mutual Fund Profile Service, with participants including Bank of New York Mellon, Franklin Templeton, JPMorgan and State Street.

It was an opportunity to apply control principles that are “important for a number of things,” DTCC Digital Assets managing director Renee Berman explained. “One is for our internal risk teams to get comfortable with the risks that we are evaluating or risk that we are including as part of our issuance or part of our activity. We want to be able to show, here’s the specific risk, and here’s the compensating control that we’ve put in place to mitigate that risk.”

DTCC utilized the Ethereum blockchain, but that was not exclusively mandatory for users.

DTCC, Clearstream and Euroclear plan to move forward at a measured pace with the Digital Asset Securities Control Principles (DASCP), which Berman said will likely be reissued annually to adjust for changes in the market, and will drive conversations around standards.

Traditional-Market Equivalence

Activities in DASCP’s scope are issuance, clearing, settlement, custody and asset servicing. Functions include registration with central securities depositories, regulatory compliance, calculation of margins, netting obligations, communication of those obligations, settling payments, ownership and reconciliation of transactions, maintenance of ownership records, and providing dividend payment, splits and rights issues services for issuers of tokenized securities.

DASCP addresses the siloed nature of processing tokenized digital assets, according to Berman. “All the issuances, debt tokenizations or money market funds are being done in silos, one-offs, or as experiments,” she said. “We want a robust digital-asset security market that is as safe and secure as the traditional security market.”

The DASCP is “not about creating fixed standards; rather, it is laying the necessary groundwork that will inform the development of comprehensive industry standards in the future,” says the financial market infrastructures’ white paper.

While DTCC is deploying operational assets acquired with Securrency, the digital-asset ecosystem will be open for users operating with different technology providers. DTCC is working to ensure that the Securrency technology complies with SEC Regulation SCI (Systems, Compliance and Integrity).

Interoperability Demonstration

DTCC, Chainlink and others in the NAV pilot are active on various other fronts.

In a September 2023 online article, Stephen Prosperi, DTCC executive director, innovation strategy and digital assets, wrote that a “cornerstone of success” for FMIs including DTCC and the Swift interbank messaging network is “the establishment of industry standards that allow a multitude of financial institutions operating on disparate systems and in different jurisdictions to conduct business in a secure and efficient manner.”

Hence, Swift’s Blockchain Interoperability Project “showcasing how financial institutions and FMIs can utilize their existing Swift connection in combination with Chainlink to instruct the transfer of tokenized assets across public and private blockchains. Chainlink CCIP [Cross-Chain Interoperability Protocol] was used on the back end by Swift to facilitate secure cross-chain messaging and token transfers, while DTCC served as a token issuer and central securities depository.”

Chainlink CCIP interfaced with existing Swift infrastructure to facilitate the secure transfer of tokens across blockchain networks.

In early July, digital-asset banking venture Sygnum and Fidelity International announced a partnership with Chainlink to bring NAV data on-chain in what they termed a “landmark production use case for tokenized assets.”

Chainlink then introduced its CCIP-powered Digital Assets Sandbox for capital markets innovation.

The sandbox “enables institutions to access ready-to-use business workflows for digital assets,” said a blog post. “For example, institutions can use the Chainlink DAS across multiple blockchain testnets to digitize a traditional bond by converting it into digital tokens and enabling these tokens to be traded and settled on a delivery versus payment (DvP) basis, along with many other real-world examples involving a variety of financial instruments across their entire life cycles.”

Collaborating at Scale

Meanwhile, financial institutions and infrastructures are moving standards and interoperability forward in multifaceted, collaborative group efforts. A sizable cross-jurisdictional example is the Monetary Authority of Singapore (MAS) Project Guardian. Participants range from Apollo Capital Management, BNY Mellon and Citi to Euroclear, Franklin Templeton and JPMorgan.

The Canton Network pilot, coming out of the financial industry blockchain pioneer Digital Asset Holdings, billed itself as “the most comprehensive blockchain pilot to date for tokenized real world assets.” It said in March that it had demonstrated the interoperability of 22 independent capital-markets distributed ledger applications (dApps). Organizations with blockchain applications in production, including BNY Mellon, Broadridge, DRW, EquiLend, Goldman Sachs, Oliver Wyman and Paxos, “provided market expertise for the working group.”

Five asset managers, 13 banks, four custodians, three exchanges and one financial market infrastructure (DTCC) participated in the simulated transactions and/or demonstrations. 

In July, Canton said it went live with its Global Synchronizer – “providing first-of-its-kind connectivity for the tokenization and frictionless exchange of regulated financial assets and liabilities” – as well as Canton Coin.

ECB Next Wave

Another magnet for multiple participants is the European Central Bank’s testing of DLT for settlement in central bank money. A long list of stakeholders was approved for the program’s wave 2, with the ECB adding that “three Eurosystem interoperability-type solutions will also be tested as part of Project Meridian FX. This project was launched by the Eurosystem and London centers of the Bank for International Settlements Innovation Hub, together with the Bank of England.”

The Federal Reserve Bank of New York has joined with six central banks in another of the many BIS Innovation Hub programs, Project Agora for wholesale cross-border payments, testing “tokenization of central bank money and commercial bank deposits operating on a shared programmable ledger.” The bank’s New York Innovation Center’s Project Cedar partnered last year with the MAS on Cedar x Ubin+, exploring “the ability of distributed ledger technology to establish connectivity across heterogeneous simulated currency ledgers, reduce settlement risk, and decrease settlement time.”

In the ECB’s wave 1, Eurex Clearing, part of the Deutsche Börse complex, tested a Bundesbank “Trigger Solution” use case for centrally cleared repo. “The repo instrument is a native digital commercial paper traded on Eurex Repo’s F7 platform; issued and settled on Clearstream’s D7 DLT-capable digital securities platform,” said a June 24 announcement.

“In wave 2, Eurex Clearing is involved in trials that settle cash amounts via the ledger of the Banque de France’s Full DLT Interoperability Solution. The wave 2 trials encompass two use cases: cleared repo transactions, similar as in wave 1, and intraday margin calls.”

Cboe Clear Europe is also in wave 2 after working with ABN Amro Clearing Bank to explore “the use of central bank digital currency (CBDC) as collateral, with the intention of testing the viability of the solution for margin calls outside the opening hours” of the EU’s TARGET cash settlement system.

Jeffrey Kutler of GARP contributed to this article.