How can we accelerate growth?
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What key obstacles need attention in 2024?
1. Shifting from pilots to live DLT: No simple task.
Despite years of experience and experimentation, DLT appears to be getting harder to use in 2024.
As the number of live DLT applications increases, respondents are experiencing the challenges of deployment and adoption for the first time - and moving from the controlled world of a test environment to a live, commercial DLT application is a big leap.
Plugging digital assets and their applications into core banking systems and payment rails, and incorporating them into balance sheets is fraught with complex challenges. Transacting across counterparties requires testing and system integration. Dealing with new, revenue-paying clients requires brand new contractual agreements.
All of these needs require input and involvement from control functions (such as legal, compliance, audit, etc.) who may not have been privy to previous rounds of experimentation and pilots. More importantly, these same stakeholders may not even understand why these projects are necessary (see below), making the deployment challenge harder than ever.
Only when these issues have been overcome to considerations of liquidity and legal validity then enter the equation.
2. "You're not solving my problem"
For five years, the single biggest obstacle to DLT / digital asset development has been the business case. So what does that mean in 2024?
Simply put, it means that the three biggest intended beneficiaries of DLT projects are the least engaged, and 86% of them don't understand the business case for DLT at all.
At the heart of the DLT deployment challenge is the fact that we are not speaking to the right people. As we explain above, we know that DLT's business case today is strongly anchored around cost efficiencies, treasury benefits and new product revenues. Yet the three core stakeholders who should benefit from these outcomes (i.e. Operations, Treasury and Sales) are the least engaged on digital asset initiatives today. Not surprisingly, almost all of them are struggling to understand what all the (digital) fuss is about.
It's a problem of perspective. Today's DLT and digital asset initiatives continue to be driven by innovation, strategy or product teams, or by C-level business management. The core users who should be most involved in setting the priorities, identifying the problem or determining the solution are not – and worse, they don't even see the need.
That lack of engagement is a real risk. At best it means that the people running our businesses don't understand the benefits that DLT and digital assets are able to deliver. At worst, it means that their lack of engagement (and understanding) will form an active blockage to progress, as they refuse to allocate investment budgets and time to digital initiatives.
The solution is concerted engagement and real listening to ensure that digital innovation can be put on a path of convergence with the multitude of pressing priorities that core business managers face every day. It is not enough that the DLT and digital assets deliver benefits, we need DLT to be visibly solving the problems that matter to operations, treasury and sales heads if we are to see meaningful investment and adoption.
3. Security is winning over liquidity.
2024 has seen a significant increase in the use of private blockchains - potentially putting at risk the objective of bringing together isolated liquidity through wider, more aggregated networks.
Security has long been front of mind for the sell side, where the risk of exposing either your own or client data to competitors is a non-starter. But in 2024, guidance such as the BIS's SC060 has imposed punitive risk weightings to all profiles of digital assets if they are managed on permissionless blockchains. For the first time, underlying technology and network choices are now effecting asset treatment - putting banking institutions around the world on an inevitable path towards private, closely managed and secure networks.
Unfortunately, this comes at a cost - as private blockchains create individual digital islands with limited ability to interact. The inability to deepen liquidity makes private blockchains a less-than-optimal solution. Whilst bridges and message-based protocols can orchestrate interactions with other blockchains and provide a semblance of interoperability, this is an imperfect solution as it reintroduces sequential processes, critical points of failure and potential errors into DLT workflows.
We will need to find a way for public and private chains to interoperate, so that new digital assets and tokenized traditional assets can interact. Otherwise we'll create more fragmentation, limited liquidity, along with a lack of asset utility and mobility. The benefits we're trying so hard to achieve will remain elusive.
4. Interoperability: Whose responsibility?
In a year when the focus transactional liquidity is paramount, everyone recognises that interoperability is critical to the continued evolution of DLT and digital assets. Across the world, 2024 has seen a multitude of interoperability initiatives begin, at both large and small scales. The Global Layer 1 initiative (led by the Monetary Authority of Singapore), the Regulated Settlement Network (under SIFMA's leadership in the USA) and Project Agora (by the BIS) have attracted more than 100 firms in total so far - and look set to provide meaningful, additional clarity on industry models in 2025. On the commercial side, Canton now connects over 45 organisations across a single digital network.
But whilst there is a lot of work underway to achieve it, it’s worth looking at where those endeavors are best placed. As the last five years have shown, the ability for any one issuer or investment bank provider to make a meaningful impact on interoperability is limited at best.
Based on our survey, the centre-point of interoperability is, instead, at the application level today - meaning that platform providers need to ensure that their data models are consistent and transferable, and that they are able to effectively process transfers of tokens from their platform to another. The only core responsibility of the network provider is to ensure legal certainty of transfers.
Industry discussion continues about how this standardisation of data models can be effected - with the Common Domain Model (CDM) and ISO20022 both offering potential solutions as the core data models for securities held on chain. Which standard prevails, in which context, looks set to be a core theme of discussion for 2025 and beyond.
DLT in The Real World with NSDL:
How can DLT bring trust and automation to a heavily decentralised market ecosystem?
In this latest episode of our DLT in the Real World series, Vishal Gupta from NSDL explains how DLT is transforming the issuance and management of debentures in India – with adoption rates of over 70%.
5. Digital cash: What exactly do we want?
Since our research began in 2019, firms have been adamant that Central Bank digital cash (in the form of CBDCs) was the only viable form of digital cash for them.
Yet in 2024, the absence of any viable forms of CBDCs has combined with the growing pressure on firms to launch commercially viable digital platforms to form a trigger for many firms to finally see past CBDCs - and to operationalise other forms of cash token.
The challenge however is that there is limited consensus around exactly what those cash tokens should look like. For banks (driven as they are by Basel and LCR rules), the priority is liquidity - how to strengthen the resilience of the token by ensuring that it is backed by extensive market depth and turnover? Yet investors (subject to UCITS, 40 Act or ERISA regulations) are more concerned about the transparency of their tokens - can they withstand days of extensive due diligence from a credit, market and operational risk perspective (and are all eventualities entirely provided for)?
Perhaps due to this strong divergence of objectives, there is no clear digital cash token emerging to take the place today of the CBDC.
Whilst 57% of banks and 50% of investors are now using non-CBDC tokens in their daily, live operations, no single form of digital cash is predominant. Bank-issued stablecoins appear popular between banks, but tokenised payment systems (such as Fnality in the UK) and tokenised deposits also play a role.
This is doubtless set to change.
In Hong Kong, for example, new regulations around stablecoins will elevate levels of transparency and resilience in the near future - making them more appealing to conservative investment managers (albeit most often in a domestic context and without cross-border scale).
More importantly, tokenised money market funds appear to be gaining ground quickly. They are asset-backed and so constitute a counterparty risk improvement over a cash liability from a bank - and they are also income bearing. If they can be successfully mobilised to the requisite levels of liquidity (as Calastone and Digital assets are demonstrating), money market funds could potentially offer a transformational, new cash mechanism to support a new wave of digital liquidity.
6. Tokenisation: The bedrock of future growth.
Whilst continuing questions around regulatory certainty stand in the way of much native digital asset activity, 2024 has seen the landscape for tokenisation advance significantly - to the point where it now forms the majority of DLT and digital asset activity around the world. Reinforced by regulatory guidance from BIS, FINRA and others, firms are now increasingly confident in their ability to treat tokenised securities in the same way as they do the traditional underlyings (in terms of accounting, risk, etc.), so long as the 'pegging' between the two is entirely resilient. Regulatory obstacles are falling away.
This opens up extensive possibilities and has facilitated the tokenisation of all kinds of assets in 2024 - from trillions of dollars in collateral and derivatives all the way through to carbon credits (in North Trust's Carbon Ecosystem, for example).
Looking ahead, tokenisation looks set to be the cornerstone of the next phase of DLT and digital asset growth - addressing as it does all of the major concerns faced by the industry today. Tokens are easier to explain and to operationalise (addressing the core issue around stakeholder engagment and ROI). They naturally act as a 'bridge' between liquidity in traditional market securities and in natively digital securities - and hence negate the need for painful choices of digital versus traditional liquidity. And they are increasingly (legally) viable - even in the most stringent of regulatory regimes.
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