Today Delta Capita, the capital markets service provider, announced the launch of its new Distributed Ledger Services venture and the acquisition of the capital markets division of blockchain firm SETL. Its first project is to work on a blockchain-based central securities depository (CSD) for Montis, a subsidiary of digital asset exchange Archax, which is backed by abrdn. Montis is also taking a minority stake in the Delta Capita venture.
During the transition from legacy to tokenized infrastructures, CSDs are a critical interoperability point between new and old infrastructures and different blockchains. The Montis CSD is targeting a Q4 2023 launch and aims to support multiple permissioned blockchains to settle debt and equity digital securities.
“The tokenisation of digital securities is at an inflection point and Montis embraces this new paradigm shift in capital markets,” said Montis CEO Martin Watkins. “Montis is establishing the DLT-based infrastructure required to support the settlement of MiFID-compliant native and non-native digital securities tokens alongside conventional securities.”
One of Archax’s highest profile backers is asset manager abrdn which has shown a keen interest in tokenization. Hence there’s no big surprise that the first jurisdiction that Montis is planning is Luxembourg, the popular destination for fund issuance.
The tokenization opportunity for Delta Capita
Delta Capita’s core customer base is broker-dealers, sub-custodians and global custodians. In the last year to 18 months, asset managers and wealth managers have become very interested in tokenization and the custodians and broker-dealers need to be able to service these clients. Hence they’re playing catch up and Delta Capita says there’s been significant demand. We’ve seen this elsewhere, with Germany’s DZ Bank ending up on the cutting edge of tokenization because its client Union Investment sees the benefits as an asset manager.
Looking at Delta Capita’s new division, it fits in with the company’s strategy. Currently, a significant proportion of technology infrastructure is bespoke to each bank, even when it doesn’t deliver a competitive advantage. “We expect many banks to share the same service, the same technology and operations. So one service, many clients. That hasn’t been done properly in capital markets yet,” Steve Vinnicombe of Delta Capita told Ledger Insights.
DLT will be one part of these solutions and the alliance with SETL ticks the box.
SETL’s expanded reach
From SETL’s perspective, it sees the deal with Delta Capita as a route to commercialize existing intellectual property (IP) “given Delta’s global presence and specialisation in capital markets,” said SETL’s Anthony Culligan.
The IP is jointly owned, so it does not preclude SETL from marketing to its own capital markets clients. If Delta licenses the software, its own subsidiary will receive the license fees. “Both SETL and Delta are free to develop the software and to market to their respective capital markets clients subject to these arrangements,” Culligan told Ledger Insights via email.
SETL has its own core permissioned blockchain technology as well as an interoperability solution PORTL. Alongside fellow blockchain firm Digital Asset, it has been a key technology provider for the Regulated Liability Network (RLN), a major initiative to integrate digital currencies of commercial banks and central banks onto a common network. The RLN work is not part of the Delta deal.
This transaction l has several benefits for SETL. It brings in cash and helps expand SETL’s usage in capital markets. That also helps entrench its position in RLN when one or two people have questioned whether RLN should be DLT-based.
SETL originally developed two capital market solutions, one a CSD (ID2S) and the other a fund trading platform IZNES. The commercial paper CSD solution was launched by Orange and Citi with several French banks as participants but failed to get traction and was shuttered.
Meanwhile, IZNES is the successful French platform for trading investment funds that SETL originally developed. However, IZNES switched blockchain technology from SETL to Hyperledger Fabric last year, citing a desire to use open source technology. While SETL has open sourced much of its code, it is very linked to the firm, which was unexpectedly acquired by Turkish firm Colendi last year before the IZNES switch.
Update: added Luxembourg jurisdiction and Delta Capita section