Digital Assets need digital market infrastructure not analogue rails
Capital markets need to be democratized for FinTech innovation for the masses
By Hirander Misra, Chairman of GMEX Group and SECDEX Group
Many old-world solutions are being passed off as game changing blockchain enabled digital asset plays. As those in the market who could really benefit get increasingly savvy, the hype that is being marketed by some will see the cold light of reality. This presents an opportunity for those that can truly harness the power of blockchain enabled digital assets to create tomorrow’s unicorns like the internet revolution did for some firms, but with a wider degree of democratisation beyond just corporate benefit.
Financial Markets Trends
The financial markets are rife with too many intermediaries. Intermediaries can add a great deal of value; however, we need to reduce the number to increase efficiency and decrease frictional costs. Blockchain can be a tool to help this, making trading, clearing and settlement more efficient. Yet many ventures embracing blockchain, in terms of permissioned ledgers, are primarily doing so using the old centralised model they are accustomed to. By way of alternative, the decentralised exchanges and broader Decentralized Finance (DeFI) plays currently struggle to match liquidity flow and have some security issues. Beyond this we are beginning to see the convergence of B2C and B2B to create a B2C2B construct.
The real challenge is to optimise retail and wholesale activity in capital markets using the best facets of both centralised and decentralised technology and services. Banks are increasingly taking up digital assets, both on the wholesale and retail side, as well developing digital custodial services with cryptocurrencies gaining the most traction and security tokens predicted to follow.
Aside from the technology itself, traditional exchanges entering into digital assets require regulatory, operational and business level guidance to be able to integrate the external digital processes into their current non digital activities. Such exchanges will have their own central securities depositories to hold assets on behalf of clients. This presents a big opportunity to tokenise and package existing assets, integrating the new digital/ crypto rails with traditional payments rails to facilitate effective settlement.
The old world and the new world will have to coexist for the foreseeable future and with multiple blockchains and legacy networks, with the need to bridge the gap between both worlds. Solutions that address this, – both with technology and at the transactional business flow level – by meeting the cross border regulatory requirements are the ones which will lead to fundamental change in capital markets.
The need to make this interconnection more efficient is being driven by large established institutional players increasingly coming into the digital assets market with significant existing clients, products and trading volume with a need to scale this efficiency and capture new revenue.
Analogue to Digital with Exchange 4.0
Many financial markets participants run their services in silos, including custody, and moving assets between these participants is cumbersome, slow and expensive resulting in multiple inefficiencies. There is rarely a link back from digital to traditional financial infrastructure as the new so called digital exchanges, custodians and banks have merely replicated this analogue model therefore also presenting huge inefficiencies for asset portability. In reality as institutional players increasingly come into the digital assets market, there is a need to make this interconnection more efficient, if we are to see mass institutional adoption of digital assets across capital markets.
The solution is to link digital exchanges and digital banking with new product creation across nodes (jurisdictions) aligned with traditional and FinTech services. This will create Exchange 4.0, a global interplay for exchanges/ trading venues and post trade market infrastructure. The related ecosystem will benefit from easy replication of local instances that are interconnected, and consequently transform the silo exchange and capital markets market infrastructure analogue construct to a digital interconnected ecosystem with its own nodes. This will include the ability to interface with other networks and services and will enable distribution of suitable products, qualified by jurisdiction, across the entire network thereby leveraging the network effect with each node.
Exchange 4.0 will facilitate more efficient trading, clearing and settlement of all assets eradicating the age-old exchange silos. This will make it easier for institutional participants to trade across exchanges and utilize assets held in custody without the security risks of moving them as well as facilitate cross jurisdictional smart contracts in addition to harness 3rd party services such as KYC/AML and data analytics.
From the 4th Industrial Revolution to Society 5.0
The advent of new technologies, including Blockchain, Artificial Intelligence (AI), Internet of Things (IoT) and Quantum computing, is greater than ever before and enabled by an increase in cloud computing. I believe we will see greater convergence of these technologies (e.g. blockchain smart contracts driven by data and AI) to foster a fourth Industrial Revolution (4IR). But how does one transition to “Society 5.0” from this?
Society 5.0 refers to the fifth stride in human civilization evolution. To create a “super-smart” future society which leverages the technological innovations of the current 4IR to achieve economic advancement and embed these in society to solve people’s problems so that they can live better lives.
Society 5.0 addresses a number of key pillars: Infrastructure, FinTech (including blockchain), Healthcare, Logistics and AI. Nations which harness this effectively will become the super societies of the future. Taking FinTech to the next level, reinventing the way financial services are conducted, will be essential for such enablement.
The next generation “Digital Asset FinTech Hubs” will play a key part in this facilitated by policy and regulation. These hubs will increasingly interconnect with each other to become “Smart Digital FinTech Hubs”. The new age digital infrastructure will have the power to assist in the economic recovery, bringing hundreds of millions of the most underprivileged and displaced members of society into a new digital financial system.
This will facilitate the development of local expertise in digital assets and related services. It will attract the most innovative international FinTech companies and greater foreign investment into countries which embrace this with an environment that fosters innovation aligned with cohesive policy and regulation. The positive effects of this will be job creation, associated GDP growth and knowledge export to interconnect and enhance other similar hubs.
While decentralized purists may cite that this goes against the ethos of crypto being democratized, it will lead to greater benefits by harnessing the way that institutional markets work. Using a regulated approach that is expected by investors, centralized finance and DeFI will combine to create some great opportunities and innovation.
The approach of harnessing Exchange 4.0 and the wider FinTech developments of 4IR to lead to Society 5.0 is the future of financial markets and will be as positively disruptive as the internet was overall, but in a capital markets context that has wider social impact and financial inclusion.