DLT and digital assets
__
Where is digital liquidity forming - and why?
1. A multitude of regional narratives.
Digital assets and DLT liquidity are evolving at different paces all across the world - such that there is no single digital narrative in 2024.
Asia and Europe leading the world in the maturity of their digital activity, with over 40% of firms running live projects, based on early adoption and on the support of highly engaged regulators. Asia has seen the highest levels of sovereign debt issuance in 2024 (largely due to the Hong Kong Monetary Authority), with digital bonds feeding not only institutional but also retail markets across the region. In Europe, the institutional markets are buzzing with regulatory initiatives (such as MICA, the ECB DLT trials, the EU Pilot Regime and the UK Digital sandbox) - all of which are building new industry guard rails for cryptocurrencies and all types of digital asset across the region.
In the US, 2024 has seen a marked contrast in activity across the sell-side and buy-sides. With banks still unable to transact digital assets in the USA, almost 80% of American digital asset activity is now being run offshore. DLT activity on the buy-side, however, is growing rapidly - mainly in the form of tokenised money market funds (with Blackrock's BUIDL fund surpassing USD500 million in subscriptions in less than five months).
Where are we seeing new life in digital projects? Regions with favorable emerging regulation, like Latin America, where accelerating development can be seen in a number of active pilots including ways to use cryptocurrencies to broaden retail and institutional financial inclusion. Africa and the Middle East have entered an active exploratory phase and are looking at crypto as a way to store wealth and cope with currency fluctuations (particularly in Africa).
Ultimately, we’ll need to see convergence between the institutional liquidity that’s the focus of more established markets, and the retail crypto liquidity that’s at the forefront in Latin America and the Middle East/Africa. Retail investors who have digital wallets represent a growing source of liquidity that will remain off-limits to the exchanges, hampering growth for everyone - including the buy-side that is looking to increase distribution and gain a bigger share of digital wallets. It will be interesting to see this play out in APAC, which could be a bellwether given its dual focus on institutional and retail use cases.
Dig into the details in our podcast series!
DLT in The Real World:
The evolution of the digital assets market in Africa.
In this episode, part of our latest series of ‘DLT in The Real World’, run in partnership with ISSA, we explore how DLT is creating new opportunities for wealth and institutional players across the African markets.
2. From operations to treasury: A fast-evolving business case.
And why is digital liquidity forming?
Cost savings are now the biggest driving force behind DLT and digital asset initiatives, replacing "Learning and Development" as the #1 driver of DLT projects in 2024. Cost efficiencies are the easiest to see and to cite as achievements when new solutions go live. While savings are an important component of a successful business case, simply lowering costs isn't enough to spur large investment. The benefits generally reflect a moment in time (such as savings from lower headcount or reduced data) and are quickly internalised once a project goes live. Cost savings are the beginning but can not be the entire business case for digital assets.
Rather than focusing on moment-in-time savings (such as issuing a bond 20% more efficiently), a number of industry leaders are now focusing their attention on how to leverage DLT to transform their balance sheets in a way that will deliver hundreds of millions of dollars in savings, every year. Moving to intraday repo, for example, can eliminate overnight funding lines, reduce collateral needs and capital charges - in a way that can drive 10-100x of savings or get rid of hundreds of millions of dollars in liquidity ratios and regulatory capital. The emerging fixed income ecosystem, with its downstream benefits to collateral, lending and capital, is one reason that treasury-driven projects have increased by two-thirds in the last year.
The compelling use case for treasury is delivering impact. Broadridge's DLR platform, for example, is delivering USD 2M+ reductions in operating costs. Both buy and sell side are realizing tangible benefits beyond pure operational efficiency: saving ~25-50 bps of premium by not having to borrow from an internal treasury, avoiding 100+ bps penalties for late-day borrowing, and eliminating overdraft fees caused by failed settlements which can exceed ~300 bps. Capital charges for internal borrowing and daylight overdraft costs are declining, while the ability to meet RQV without overcollateralizing results in an average ~25% clearing cost reduction.
The list of potential benefits is long - and increasingly appealing to both Operations and Treasury heads in 2024.
3. Across the sell-side, bonds have momentum.
With growing issuance – more than 55% of all digital issuance to date – and liquidity beginning to form, bonds have emerged as the sell side's most compelling use case, driven by the utility of bonds, particularly sovereign bonds, in post-trade. Their value as collateral and in securities financing transactions is driving an expansion in use cases and collateral platforms.
These range from established solutions such as Broadridge's DLR platform, which has delivered mobility, intraday liquidity and transparency to the repo markets, to expanding use cases for platforms like J.P. Morgan's Tokenized Collateral Network on Onyx (initially focused on tokenized money market funds and intraday repo) and HQLAX (which is using a digital collateral registry to record ownership and execute real time transfers using a central marketplace). New entrants such as Archax's blockchain solution are looking to tokenise UK government securities and use them in the repo market.
A deeper look at annual digital turnover shows how the collateral lifecycle (including bonds, payments and securities financing trades) now makes up almost half of all institutional digital liquidity. Better, faster financing and collateral management delivers value at multiple organisational levels, from operational efficiency and risk reduction to lower financing costs and better capital utilisation. This makes it a broadly appealing use case within an organisation and across different organisations – important when you consider who is funding these projects and who is benefiting.
The initiatives driving this liquidity are numerous. In addition to the repo and collateral platforms above, the Hong Kong Monetary Authority, Swiss Digital Exchange (SDX), DTCC and ECB have all been active in driving test and live cases around collateral in 2024 - with more to come as Equilend's 1Source platform for securities lending and others come online soon. Market initiatives in 2025 look set to add further weight to the business case for instantly mobile collateral, with mandatory US Treasury Clearing and additional clearing requirements across many markets triggering further growth in collateral requirements.
This is one area where the benefits of tokenisation are clear enough to be driving significant transactional activity this year.
Dig into the details in our podcast series!
DLT in the Real World:
Broadridge DLR and the transformational benefits of DLR in treasury
In this fascinating episode of our DLT in the Real World podcast series (in partnership with ISSA), Horacio Barakat and Paul Chiappetta join Barnaby Nelson to discuss how DLR is already delivering on ”phase 2” treasury benefits – well beyond the operational savings that were first envisaged. As one of the most mature uses of DLT in our markets, this is great evidence of the continuing and evolving benefits of the technology.
4. Tokenised money market funds: The buy side's entry into DLT.
The buy side is finally engaging in DLT – but not in the ways you might expect. Unlike the operations and portfolio managers who may see benefits from other organisation’s post-trade DLT projects, the distribution arm is looking at DLT for revenue growth. The goal? Create digital assets to entice investors who jumped into the crypto markets and capture a share of those new digital wallets.
In the process, DLT will redefine the distribution process to improve efficiency and profitability. Layers of intermediaries – bank distributors, wealth managers and RIAs – vanish from the process. Retail investors can open an account and invest in a tokenised fund: it’s faster, easier and automated, without the cumbersome and costly distribution processes of the past. Given the rapid success of Blackrock and other tokenised funds in 2024, it's no surprise that 80% of the buy side sees the value of the distribution opportunity – an enormous change over just three years.
The strong pipeline of buy-side DLT-driven distribution projects could have some broader ramifications. It may increase pressure for institutional and retail liquidity to converge. It could also perpetuate the split between the private blockchains generally used for institutional assets due to security reasons, and the public blockchains that will be more useful for reaching a broader group of retail investors.
Like digital issuance, money market fund initiatives are early in the transaction chain. This enables benefits to be achieved more quickly as the projects don’t get bogged down in the complexities of the post-trade lifecycle. Whilst numerous DLT projects have targeted components of that lifecycle, and the opportunities are real, complex processes and interdependencies have made for slower progress.
By keeping it simple and focusing on immediate, commercial opportunities, asset managers have succeeded in making tokenised (money market) funds the fastest growing asset class in 2024.
5. Private markets: Coming soon to a market near you.
If fixed income liquidity/mobilisation and mutual fund distribution are the present tense of DLT initiatives, what’s hovering on the horizon? A look at where ecosystems are large or growing shows that physical assets are soon to be a digital reality across the capital markets.
Sitting in the top 3 on both lists are private markets and private equity: making them the future tense of DLT initiatives. These assets are critically important to institutional investors and wealth managers seeking higher returns as discussed in ISSA’s 2020* Future of Securities Services white paper. Private debt, which appears further down the list, can be folded into this grouping. The decentralisation of private markets creates both an opportunity and a challenge - a challenge because there’s no single player that can create scale through a DLT initiative, but an opportunity since there’s no existing marketplace and the processes are manual and inefficient.
This creates the opportunity to leapfrog older technologies and create a new, digital market structure - as TMX's Project Revo looks set to do by demonstrating efficiencies of over 60% during its work in 2024/2025.
Tokenisation instantly solves the mobility challenge of alternative assets and opens them up to new (secondary) trading activities that have previously been off-limits. With many firms eyeing this important market segment for 2025, substantial progress seems highly likely.
Benchmark your own DLT plans here
How do your DLT project plans and roadmaps compare with those of your peers? Make sure you use this unique opportunity to benchmark your work with over 350 other specialists today.
Thanks to the extensive reach of our industry survey, we can provide you with detailed, personalised analytics in your own benchmarking scorecard - as soon as you have completed the online survey. Click below to begin and we will send you your scorecard straight away.