This is a guest opinion post by Jens Hachmeister from Deutsche Börse’s Clearstream, where he is Head of Issuer Services & New Digital Markets.
It is hard to overstate the disruptive potential of digitisation for any industry. Take the music industry: CD album sales in the United States are now 95 percent lower than at their peak in 2000. Why? Because the product has been fully digitised. The advent of the mp3 and streaming has made the physical medium obsolete, providing instant access to everyone, from anywhere in the world at any time – at no risk of losing your favourite tunes due to a scratched CD.
Digital securities are still relatively nascent, but harbour just as much potential to change financial markets and connected business models as seen for example in the music industry. However, for the digitisation journey to truly take off in the financial industry it needs suitable foundations. In other words, the reliable, robust and scalable technical infrastructures that are now available, supported by appropriate regulatory frameworks. On top of this, current business models will have to be re-considered and new approaches that cater to the markets of tomorrow will have to be developed and implemented – whilst always ensuring market stability.
The best music streaming service would fail without a clear legal framework. No artist will want to make their music available if the copyright or royalty situation is unclear. The same applies to financial markets: market participants need clear rules that are fit for purpose. Strong regulation underpins credibility and confidence in capital markets as it aims to create a level playing field for all participants. European regulators have been working to create regulatory frameworks that work for various domestic markets as well as on the EU level (see Germany’s Electronic Securities Act (eWpG) or Luxembourg’s law on digital issuance or the EU Digital Finance Package (Blockchain Act II), just to name a few).
Stairway to market adoption
Despite these positive signals from regulators providing guide rails for the market to move more freely towards digitisation, we have seen a relatively slow uptake of the opportunities and potentials among market participants so far. The readiness of the market is key to the progression of digitisation, but although most financial institutions have expressed the intention to adopt digital securities, only 10–15% have started actively investing in the segment so far.
Investment in technology is costly, especially in new technology, particularly while the legacy infrastructure cannot entirely be retired and thus still needs a certain level of investment for some time. And even worse: there is no guarantee of success and no immediate return on investment. But in the end, what good is a streaming platform if no one has a smartphone on which to play the different tunes? It takes courage to stand up for the long journey of digitisation if your investment committee doesn’t immediately thank you for doing so. It takes brave pioneers who share the vision of future-ready digital markets and don’t shy away from the responsibilities that come with it. The challenge does not lie in digitising our old processes but in digitising the product itself – the financial instrument. We at Clearstream have been driving this development with our digital post-trade platform D7.
As always, technology must be tailored towards the needs it looks to address, or hurdles it looks to overcome. DLT and blockchain have been the talk of the town for some years now, but there is no holy grail for all of the industry’s problems. DLT-based systems offer a great amount of transparency, consistency and standardisation that we need urgently. But more importantly, market propositions need to acknowledge the customer needs, whether these can be resolved via a centralised or decentralised systems to form a digital financial ecosystem that works for all participants. Neutral market institutions, such as central securities depositories, play a crucial role in safeguarding this trust in the financial markets in conjunction with the appropriate regulatory framework.
More than a technology
Technology must be a means to an end, not technology for technology’s sake. In the context of financial markets, the ultimate question of digitisation must be: How can it improve the functioning of the financial markets today as well as tomorrow and allow for new products and services to be provided to the industry?
The most obvious benefit digitisation brings to the market is improved operational efficiency, which is crucial for profitability and market efficiency overall. It would be short-sighted, however, to stop there. Digital solutions also provide an enhanced user experience and room for new approaches, which in turn opens up possibilities for future growth and product creativity. From a business perspective, digitisation allows for accessibility to, liquidity in and mobilisation of assets across the financial market ecosystem. Such efficiencies and flexibilities support the development of very new business models as well as product and service propositions. A music streaming platform becomes ever more attractive the more styles that can be found there and the greater the variety of artists that add songs and tunes to the platform.