One of the most important emerging technologies in the capital markets business was discussed at last week’s FIX Americas Trading Conference: digital assets.
The Digital Assets Unveiled: Navigating the Future of Trading panel at the Oct. 16 New York event opened with a question for the audience: what has been the largest obstacle to adopting digital assets?
The most popular answer was “all of the above”, which included regulatory uncertainty (which was the second-most selected answer), limited understanding, and a lack of standards and interoperability.
To the question of when the industry will fully embrace digital assets, which are recorded on a blockchain or distributed ledger, the answer is not anytime very soon – in about five years received 43% of the audience vote, followed by eight-plus years (32%), then three years and one year.
Panelists said regulation should be good for digital assets by boosting market participants’ trust, but regulatory ambiguity in the US is a lingering issue and is a primary reason why market development in the US has lagged that of Europe. “We’re simply waiting” for regulatory clarity, one panelist noted.
Milena Kohlhofer, Head of Sales, US & Latam at Ownera, which provides global distribution for tokenized assets, said U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 121 has been a hurdle for adoption of digital assets by restricting banks’ ability to provide custody for digital assets. “People aren’t going to be comfortable,” without big banks’ involvement, she said.
The panel noted the upcoming presidential election in the US will be a turning point. “Regardless of who wins in November, there will be digital assets regulation in the next administration,” said Lee Saba, Co-Chair Global Steering Committee, FIX Trading Community, and Head of Market Structure at Rialto Markets.
Regarding the tokenization of traditional assets, Stefano Dallavalle, Head of Product – Digital Assets at R3, said the trend will continue as more financial institutions succeed in tokenizing money market funds (MMFs), bonds, and other securities.
“The technology brings efficiencies,” said Kohlhofer. “Investors don’t care if an asset is tokenized or not.”
Tokenization will likely expand to more assets, including music and art, providing an opportunity for the industry to provide custody and other market infrastructure.
Panelists noted that digital assets market structure is evolving, and history has shown that market structure evolution starts slowly but then at some point accelerates.
Use cases should remain a focal point, with the need to answer the question “Where are there inefficiencies that only blockchain can solve?” Just as mobile phone technology solved for some limitations of landline telephones, so can digital assets for traditional finance.
Ultimately, panelists said blockchain should reduce costs and trading errors in securities markets, similar to how FIX connectivity did 30 years ago.
