Last week Chile’s Central Securities Depository (DCV) announced it is upgrading its systems as it wants to be a pioneer in the tokenization of assets. Last year DCV replaced its legacy system to use Nasdaq’s CSD platform and will now also integrate Nasdaq’s digital assets capability.
The central securities depository (CSD) is eyeing the ability to use smart contracts to automate life cycle events such as interest payments on bonds ssued as digital securities. The upgraded solution will support the issuance, registration and settlement of digital securities.
“Market infrastructures are increasingly looking for ways to adopt tokenization,” said Nasdaq EVP Roland Chai. “Nasdaq’s technology allows providers to continue to provide traditional securities services while capturing the various opportunities with digitized assets.”
Will blockchain turn CSDs into dinosaurs?
Blockchain has features that call into question the future of CSDs. DLTs enable atomic settlement – the security and the payment change hands simultaneously, replacing a CSD’s role in settlement. Plus, the nature of blockchain is to provide an immutable record of transactions and hence ownership. Together this makes the CSD the most likely infrastructure to be disintermediated.
However, for several reasons CSDs are unlikely to disappear in the short term. Firstly, most countries have securities regulations that mandate using a CSD, so it will take time to modify those. The EU’s DLT Pilot Regime is exploring this sort of issue.
Secondly, CSDs play a critical role in the transition from conventional to digital securities. For example, in Switzerland, the SIX Digital Exchange’s CSD is the primary record keeper for digital securities. But for a recent UBS issuance, the digital securities were bridged to the conventional SIX CSD, allowing investors that know nothing about blockchain and private keys to buy the UBS bonds. This role will play out between technologies and jurisdictions.
A third point is generally overlooked (not in Korea). To date most digital securities have been issued on a single blockchain. If cryptocurrencies are anything to go by, with some cryptos issued on a dozen chains, that may not be the case for long. Hence there’s a need for a CSD or a mechanism to aggregate the ownership across multiple ledgers.
In the meantime, CSDs will evolve. Deutsche Bank’s Clearstream has developed D7, a blockchain based registry for centrally registered securities and Germany’s decentralized crypto securities. Euroclear is working on a bond issuance platform.