The biggest pain point for large institutions in the digital asset market is the lack of post-trade infrastructure that meets their needs according to panellists at the Global Blockchain Business Council Blockchain Central Davos Summit.
Boris Bilowitzki, chief revenue officer at native crypto custodian Copper.co, said on a panel that his firm’s technology can meet the custody needs of large institutions globally but challenges remain in pre-trade and post-trade.
“The biggest pain point right now is post-trade,” he added. “We don’t have infrastructure solutions that guys like BlackRock need.”
For example, crypto markets are 24/7 and traditional risk models do not account for this.
Bilowitzki continued that there are aspects in traditional finance which are far more efficient than in crypto, such as execution and pre-trade risk.
“There are big challenges that need to be figured out, never mind the regulatory framework” he added.
As a result, he expects institutions to be using pockets of decentralised finance in two years time. However, Bilowitzki predicted it will take between 10 and 15 years for DeFi to be broadly accepted across financial markets.
“We need to walk at the speed of traditional financial institutions,” he said. “To get things like this going from a regulatory and infrastructure standpoint is a big, big task.”
Talia Klein, director, digital asset custody at BNY Mellon, highlighted the need for legal certainty of the ownership of digital collateral in the case of default.
“The question is what happens when the music stops, who is holding the bag or who is liable and how does all that work ?” she said. “Certain people in the pure crypto space say it is all on the ledger but a judge is not going to care.”
Tanya Shastri, vice president of products, blockchain at VMware, said progress is being made in post-trade. For example VMWare’s blockchain platform is part of the replacement for the Australian Stock Exchange’s settlement platform.
Shastri said: “Translating things in the crypto space and bringing them to the enterprise is not an easy task. I think this is where we’ll see the next big things happening.”
Role of intermediaries
David Newns, chief executive of SIX Digital Exchange, said the venue has used blockchain technology to facilitate faster transactions by eliminating certain parties from the settlement chain.
“We have from T+2 to instantaneous settlement where the trade and the settlement are indivisible,” he added. “There Is no counterparty risk which is a clear benefit of the technology and available in the marketplace today.”
However, Newns does not expect overnight change in the financial industry as infrastructure changes require collaboration across global networks.
He said: “Many participants need to be able to adopt the technology and integrate it into their workflows to take advantage of the functionality. You cannot just plug it into existing financial markets infrastructure.”
Dotun Rominiyi, director of emerging technology at London Stock Exchange Group, said on a panel that the UK exchange sees its role as continuing to provide financial markets infrastructure in digital capital markets, and to help clients and the broader ecosystem evolve their business practises.
“We have direct aspirations in terms of enabling digital transformation in capital markets,” he added.
For example, LSEG has built a digital primary debt issuance platform in partnership with Nivaura and Rominiyi said the platform has been designed so that it can be used in other asset classes. There are also opportunities in private markets.
LSEG also aims to provide infrastructure to help fintechs engage with large institutions at scale and use its physical connectivity around the world. globally. Rominiyi added: “We have over 40,000 customer across 190 countries post the Refinitiv acquisition and there is an opportunity for us to help fintechs accelerate their growth.”
He continues to see an important role for regulated institutions in capital markets.
“In the crypto space the largest volume of liquidity is on centralized exchanges, and for good reasons,” Rominiyi added. “From an economic perspective, it’s the optimal model.”
Swen Werner, global head of digital custody and payments at State Street Digital, said on a panel that new intermediary services will be required in digital capital markets.
“One of the areas that I find interesting is the data oracle that needs to provide updates and information to smart contracts,” he added. “Information will have to be fed into the blockchain, and we have to make sure it is accurate and reliable.”
There is also an opportunity for organisations to help investors make sure these processes are controlled and provided safely.
“Blockchain will change how we think about intermediation and require a rethink of the value proposition,” Werner added. “We have had to reinvent ourselves throughout history and we don’t expect anything less this time around.”
