In the securities services industry, confidence is growing that the traditional and the new will coexist successfully. At Swift's recent Smarter Securities events, leaders of banks, CSDs, exchanges and FinTechs in Asia, Europe and North America shared their visions of the future.
Smarter Securities, in the estimation of Mark Smith, CEO of Symbiont, is about reinventing the securities lifecycle, from issuance to trading.
Reinvention is, reflected Stephen Pemberton, Managing Director and Global Head of Product for Banks and Broker-dealers at HSBC Securities Services, “the one thing we haven’t yet solved as an industry” thanks to processes that persist for no better reason than “that’s the way in which we operate.”
Embracing new technologies
ASX, SIX, Deutsche Börse, Euronext and Nasdaq, amongst others, are investing in blockchain technology. The HKEX Synapse project sees it as the solution to settling mainland China trades to a T+0 timetable.
Michael Drumgoole, a Managing Director in Direct Custody and Clearing at J. P. Morgan, sees “an opportunity through the nodes for participants to connect in a different way, and through smart contracts, to have much more control.”
“Smart contracts would allow a much more automated end-to-end solution.”
Julia Romhanyi, Global Head of Securities Services at Unicredit
Julia Romhanyi, Global Head of Securities Services at Unicredit, added that smart contracts could solve chronic efficiency shortcomings in asset servicing as well as settlement. “Smart contracts would allow a much more automated end-to-end solution,” she said.
Scepticism about the transformational potential of blockchain is dissipating everywhere. “With blockchain, we have a really good opportunity now, as an industry, to collectively design the new frontier,” said Gary Chan, managing director, J.P. Morgan Securities.
Andrea Tranquillini, CEO of ID2S, agreed, arguing that complexity and transaction volumes meant the necessary investment “can only be driven by the incumbents.”
Etienne Deniau, Head of Business Strategy at Société Générale Securities Services, countered that incumbents are stymied by the same factor: they have complex client relationships and revenues to support.
This is why Jo Van de Velde, Managing Director and Head of Group Strategy and Product Expansion at Euroclear, thought transformation hinged on external developments. “True disruption will come not from within but from the outside, from the real economy, the next generation, questions like how people will spend, how people will save,” he said.
Stephen Pemberton urged the industry to embrace the new technologies and ways of working. “These disruptors’ are actually `enablers,’” he said.
Tokenisation markets are on the cusp of taking off
Kwang Yeon Cho, Head of Global Securities Services Department, Korea Securities Depository, agreed, predicting that central securities depositories (CSDs) would become “data monsters” as all manner of assets and income streams are tokenised.
“If everything which is valuable can be digitalised or tokenised, it can be a tradeable product,” he said. “It is real and will be mainstream soon. The CSD business is … in front of a huge expansion of manageable assets.”
Though Philippe Ruault, Head of Data and Digital Strategy at BNP Paribas Securities Services thought the business case for tokenisation unproven, he was convinced it will come. “Digital assets will come because they bring strong changes and value-added on processes, automation, full automation through smart contracts, instant settlement, final beneficiary level disclosure,” he said.
Asked if the security token markets will be as large as the securities markets within ten years, 40 percent of the audience at the Smarter Securities – Europe event agreed.
“The beauty of the token is that you can represent anything, and not only securities, and that is what will drive at first the growth of the token."
Etienne Deniau, Head of Business Strategy at Société Générale Securities Services
“I would go further,” responded Etienne Deniau. “The token market will be larger than the securities market, because in some way it will absorb the securities market. All the securities can be tokenised today. The beauty of the token is that you can represent anything, and not only securities, and that is what will drive at first the growth of the token.”
Mark Smith thought blockchain-based tokenisation networks, by encompassing all members of existing markets, would foster “a natural peer-to-peer marketplace to then transact in the secondary market.”
The new and traditional worlds will converge
Tim Grant, CEO of SIX Digital Exchange, was more cautious. “You can’t tokenise something and magic up liquidity out of nowhere,” he said. “Liquidity is a complex dynamic that requires multi-sided platforms to be built.”
He envisages a future combination of centralised and decentralised protocols that create networks of networks akin to the Internet.
“The victors in the coming years will be the ones that are able to release from the shackles that are, ‘I’m from the centralised world and I see it this way’ or `I’m from the decentralised libertarian ideal and I see it that way,’” said Grant. “Somewhere in the middle is the answer.”
Sergey Nazarov, Co-founder of Chainlink, shared this vision of a new synthesis, predicting the open public networks of blockchain purists will become indistinguishable from the closed, permissioned networks of the traditional industry.
“The private chains that become larger and larger and grow will have a very good reason to become more accessible so that they can continue growing and continue their network effect.”
Sergey Nazarov, Co-founder of Chainlink
“The public chains will gain a dimension of privacy to meet the requirements of various institutions,” he said. “The private chains that become larger and larger and grow will have a very good reason to become more accessible so that they can continue growing and continue their network effect.”
“How do we bridge what’s happening from a traditional component to these new and emerging use-cases?” asked Stephen Richardson, Head of Product Strategy and Business Solutions at Fireblocks.
Gary Chan thought the bridges included central bank digital currencies (CBDCs) that allow settlement in fiat currency on-chain, digital identities and the “centring force” of financial market infrastructures (FMIs).
“Are they the same infrastructures ten or 15 years from now?” he asked. “Probably not. That’s probably a safe bet. But they probably will still be established players in that space.”
Cecile Nagel, CEO of EuroCCP, agreed. “We shouldn’t, absolutely shouldn’t forget the role we play as market infrastructure – trusted, regulated entities, and certainly we’ve got a role to play.”
Standards are not enough: intermediaries will still be required
Jo Van de Velde pointed out that the crucial services supplied by FMIs – security, liquidity, liability and due diligence – have nothing to do with technology, so forms will change but functions will not.
“Roles that today are implicitly embedded will become more explicit and that’s why you will see more and possibly newer roles emerging on the back of new technology,” he said.
Asked if the differences between securities and security tokens would eventually be invisible to market participants, 52 percent of the audience at the Smarter Securities – Europe event agreed.
Sergey Nazarov foresaw legacy FMI and custodial systems operating blockchain network links and vice-versa, enabling data to be exchanged seamlessly between old and new.
For the same reason, Philippe Ruault endorsed the standardisation of APIs. “Separate APIs for the same data makes no sense,” he said.
For Shuta Okawara, Managing Director and Head of Transaction Services Division at MUFG Bank, Ltd, “harmonised and standardised” connectivity between legacy and blockchain systems was essential.
“While an investor might like the idea of connecting to the HKEX or CHESS, the ability for them to connect to two completely different infrastructures is quite a challenge for them.”
Michael Drumgoole, Managing Director in Direct Custody and Clearing at J. P. Morgan
But interoperability will require intermediaries as well as standards. “While an investor might like the idea of connecting to the HKEX or CHESS, the ability for them to connect to two completely different infrastructures is quite a challenge for them,” said Michael Drumgoole. “It sets up a role for an entity that can sit and make that connection much easier for investors in the market.”
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