Earlier today the DTCC, Clearstream and Euroclear argued that they should play a major role in institutional digital assets. Currently there are too many small tokenization initiatives that lack standards. Liquidity is fragmented and many solutions are not scalable. The three financial market infrastructures (FMIs) believe they can help.
Both the DTCC and Clearstream have participated in major DLT initiatives from the early days. They certainly have the knowledge and knowhow to play leading roles. Like they say, they have the ability to coordinate amongst industry players and to help set standards.
So why wouldn’t the industry want them to take a leading role?
Some of the questions to address are:
- Can you remove CSDs and CCPs as intermediaries?
- Will they protect their existing businesses?
- Are large consortia too slow?
- Will they help or hinder with regulation?
Are CSDs and CCPs needed in a tokenized world?
One of the efficiencies of blockchain is the reduction in the number of intermediaries. The only intermediary it’s relatively easy to remove is the central securities depository (CSD) (depending on a jurisdiction’s legal framework) .
However, there are two counter arguments. Firstly, the coordinator of the European Investment Bank’s (EIB’s) bond issuances didn’t see removing the CSD as a big saving. And the EIB is the most prolific digital asset issuer. Secondly, in the future, most securities will probably circulate on multiple blockchains. Who is the natural entity to keep tabs on that? The CSD.
All three organizations operate both CSDs and central counterparties (CCPs).
Atomic settlement of securities using DLT removes the need for central counterparties. That’s true. Some netting might still be desirable, but that potentially can be automated. The DTCC highlighted the netting point several years ago, and perhaps some interpreted that as the DTCC protecting its turf. In a recent digital dollar trial, the DTCC highlighted how a CCP’s role could evolve.
Tokenization and the need for speed
Which is perhaps the strongest reason to be wary – these institutions have valuable businesses to protect, so will they drag their feet?
For now, that’s not an issue. Most early digital asset initiatives are not targeting their core markets – think bonds, private assets, real estate and music rights. So that’s not the case initially. On the contrary, it’s an opportunity for them.
But what about later on when its time to migrate core markets?
Regarding the need for speed, another counter argument is that large consortia are slow and cumbersome. That one is hard to dispute. But other regulated entities could run their own initiatives and participate in larger industry ones as well. However, there’s a budgetary cost in that. In the payments sector, that’s similar to JP Morgan’s JPM Coin and Partior (although Partior had a tight founding group).
Will they help or hinder regulatory clarity?
Perhaps the biggest question is around regulatory clarity. Together the three FMIs can help to coordinate with regulators. Clearstream already had a major influence in Germany.
However, the existing smaller tokenization initiatives can get off the ground by flying under the radar. That’s precisely because they are small. This gives digital assets and tokenization a chance to prove itself.
With these major players coordinating the entire industry, the regulator might be more wary about the risks.
On the other hand, Clearstream and the Deutsche Börse have played a key role from the start in the HQLAx project for collateral mobility.
There are plenty of pros and cons to the involvement of the three FMIs in tokenizing capital markets. The need for industry coordination is hard to dispute. In many ways they are the logical ones to do it. But it’s not a slam dunk decision.
