The digital asset revolution will not be decentralised, according to a new paper produced by three global financial market back-office behemoths.
In an “unprecedented” collaboration between the US-based DTCC and two European securities settlement and clearing firms – Clearstream and Euroclear – the report says blockchain-based efficiencies can only be realised via globally agreed standards intermediated through traditional financial market infrastructure (FMI) players
The paper says while a range of blockchain, or distributed ledger technology (DLT) as per the grown-up terminology, experiments have created some promising digital asset solutions, the scattered peer-to-peer model won’t deliver efficiencies at a truly global scale.
“In 2023, 74% of DLT projects across the capital markets involved fewer than six participants, meaning that most (but not all) projects are still yet to experience industry scale,” the report says. “As real as the… benefits may be, their impact remains limited at an industry level given that the majority of today’s projects are mostly siloed, peer-to-peer initiatives.”
In its current fragmented state, the digital asset ‘ecosystem’ is likely more costly for participants than the current interconnected global financial architecture, the paper says, highlighting the need for a co-ordinated industry-wide agreement on upgrade protocols.
“… there is an industry realisation that the adoption of these operating models at ever-greater scale is contingent on broader regulatory harmonization, industry-wide standardisation and integration of institutional-grade payment rails, as well as connectivity across DLT protocols and legacy platforms,” the joint report says.
“With a growing number of [digital asset] pilots now complete, conclusions are being drawn regarding the need for well-regulated, neutral players to provide trust, resilience and standardised connectivity in their respective ecosystems. This is a role that FMIs have been playing for decades.”
The unsurprising conclusion runs counter to the original blockchain dream of ‘trustless’ technology platforms overthrowing the incumbent financial system intermediaries.
But the so-called DeFi – or decentralised finance – model has also come under fire from global regulators of late with the International Organization of Securities Commissions (IOSCO) last month issuing a series of recommendations to manage risks in the sector.
Despite concerns about the viability of the blockchain financial system as-is, the report notes a number of successful live-money digital asset trades have provided proof-of-concept.
DTCC global head of strategy and innovation, Jennifer Peve, said in a release that the digital asset market is forecast to reach about US$16 trillion during the next 15 years.
“While we have all accelerated our learnings and identified the benefits of and constraints related to DLT on a smaller scale in recent years, there is broad recognition of the growing need for well-regulated, neutral players to provide trust, resilience and standardized connectivity in their respective ecosystems – the role FMIs like DTCC have played for decades – to drive digital asset adoption,” Peve said.
Officially known as the Depository Trust & Clearing Corporation, DTCC channelled securities transactions valued at $2.5 quadrillion through the financial plumbing last year while providing global custody and asset-servicing to more than US$75 trillion.
Likewise, both Euroclear and Clearstream, owned by the Deutsche Börse Group, are large global post-trade and fund services mega-firms.
Earlier this month the NZ Superannuation Fund (NZS) stumped up an estimated $500 million for an almost 5 per cent stake in Euroclear.
At the time, the NZS statement said Euroclear reported “approximately €36 trillion of assets under custody and over €1 quadrillion per annum worth of securities transactions”.