Citi explores tokenization to address EU capital markets fragmentation

Citi Institute has published a report titled ‘Reimagining European Capital Markets’, with an emphasis on addressing fragmentation. It’s widely known that the European Union has 36 central securities depositories (CSDs) and 13 central counterparties (CCPs), which often have monopolies in their domestic markets. However, the region also suffers from fragmented tax policies, legal divergence and other barriers. Tokenization is one avenue to address these issues.

A Citi survey asked about the top three ways to address fragmentation. Somewhat unusually, 100% of respondents selected harmonizing legal, tax and corporate action frameworks. One way to achieve this is for the EU to emphasize ‘regulations’ which are pan-European, rather than ‘directives’ which have to be adopted in each member state, often with local nuances. However, even with regulations like MiCA, there have been complaints about national regulators having different interpretations. This has led to increasing acceptance of the need for both pan-European regulations and centralized supervision. That’s why the European Commission has already proposed that European regulator ESMA take over supervision of crypto asset service providers (CASPs) as well as conventional systemic infrastructures.

For the same survey question about addressing fragmentation, just 32% selected the avenue of promoting distributed ledger and digital assets under common rules, the least popular amongst the options. One reason for this may be the more immediate pain points: the survey found that European CSDs charge 65% more than North American CSDs for settlement costs and 160% to 500% more for safekeeping charges. However, when the question changed to focusing on digital solutions, the tokenization of securities and collateral was three times more popular (36%) than using AI for post-trade automation and reconciliation (12%).

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