Paradigm Shift: Financial Instruments and Commodities Meet DLT
During the European Blockchain Convention, executives from the financial services and the commodities industry met to discuss their vision of the new era of financial instruments and commodities.
By Maria Eneva-Olms
By Magdalena Szarafin
What does the new era currently look like and what are your future visions?
David Newns sees a reduction in the number of trusted parties required to provide services down the value chain as a result of the fact that instantaneous settlement can be achieved with DLT technology. The delivery of the asset and the receipt of the payment is simultaneous, reducing costs and adding functionality and efficiency to the existing system.
Currently, the regulation is still pointing towards the opposite of making use of DLT technology, promoting the idea to have a central registry. This is detrimental to the idea of having shared technology.
“In the next five years, the majority of bond issuance will gradually become digital due to the fact that it is more cost-efficient” – Martin K.Müller, Member of the Board of Management at Dekabank
Martin expresses his disappointment about the non-existing implementation of cash on-chain. DekaBank has proposed a solution, which would encompass the capabilities of SWIFT as a messaging system with a digital signature, and so we could have cash on chain immediately.
Answering the question, Dotun Rominiyi was of the opinion that the traditional financial market is largely characterized by a lot of manual processes and paper-based workflows that have been carried out between multiple organizations. Areas such as the issuance of an asset, capital raising, asset servicing, and trading of assets, are really those where the technology can be beneficial. It is a great opportunity to develop, grow and build new technologies, digitize this landscape, increase the efficiency of these workflows, reduce time to market, and then increase access to assets.
“Traditional financial market is largely characterized by a lot of manual processes and paper-based workflows that have been carried out between multiple organizations” – Dotun Rominiyi, Blockchain Strategy at London Stock Exchange
Asked about the future of commodities, Arno Pernthaler explained how the commodities market is very different from the financial services market. The major difference is that in the commodities market, we speak about large bilateral deals between mining companies and between manufacturing companies. These are not standardized deals but rather deals where large companies have multi-year contracts developed over time. This makes it difficult to bring the commodities industry into a more digital and standardized world.
“Commodities market is very different from the financial services market. The major difference is that in the commodities market, we speak about large bilateral deals between mining companies and between manufacturing companies” – Arno Pernthaler, Head of Corporate & Business Development at Atomyze
Another characteristic of the commodities market is that it is not regulated, it is quite untransparent. Cars manufacturers, for example, have difficulties proving where the metal comes from and its ESG credentials.
Talking about the future we need to make sure that physical goods are correctly digitized, that this digital product which flows through the supply chain, from the mining firm down to the end consumer actually does not lose this physical connectivity.
The commodities market is moving into the era of smart products with installed corporate credentials, corporate insights, and corporate data into a product. These products can become tradable through fractionalization. Illiquid products could become more liquid through the standardization of contracts.
What has to happen so the new era comes?
Maria expressed the opinion that regulation is still in progress and it is one of the prerequisites for the financial and commodities markets to be enabled to fulfill the vision of the future.
David Newns pointed out that Switzerland is leading in terms of providing clarity around regulation. The regulator should engage with the industry and explore the opportunities DLT technology offers. At SDX, they consider the relationship with regulatory bodies as absolutely essential, both in terms of SDX understanding what their requirements are, and as an opportunity to educate them about the possibilities and the benefits of the technology.
David has also pointed out that in order to arrive in the envisioned future, the financial services sector has to develop its infrastructure towards the new technology. The time horizon of around 10 years (also given by Martin K. Müller) is probably accurate for the industry to migrate to this new infrastructure.
“In order to arrive in the envisioned future, the financial services sector has to develop its infrastructure towards the new technology” – David Newns, Head at SIX Digital Exchange
Unlike simply the adoption of a FinTech, the current transformation is a much broader process. This is a move from the traditional ecosystem, environment, and digital infrastructure, to a completely new infrastructure. It requires different ways of interacting between participants and more partnerships as well as work collaborations. Almost by definition, distributed ledger technology requires a consortium mindset in almost every context.
Regarding the last point, Maria Eneva-Olms explained the concept of an island: currently financial institutions are building PoCs as their own island solutions. However, we have to think about how to integrate these islands, or how to make them work together. This interoperability between these islands is the next challenge we have to work on.
The idea of collaboration across the network has also been supported by Dotun Rominiyi. In his opinion, there is an expectation that, in the longer term, in order to really yield value and bring critical mass to the infrastructure, we need interoperability at a scale we are not really thinking about at the moment. Standardization will take a lot of work on this massively interconnected network of networks.
Also, Martin K. Müller pointed out that a change of mind is needed. The financial services participants need to learn to work together and create a mutual standard.
What are the key solutions your organisations have already built and brought to the market?
Atomyze AG has built a marketplace, which has been live since last year. They have onboarded industrial participants, mainly to transact commercial deals in the form of tokens over the platform. It is like a digital marketplace for primary market transactions, where a mining firm is selling nickel, copper, cobalt, palladium, or other precious metals to the industry, for production purposes. Traders use the DLT to transact private tokens representing future deliveries.
SDX has built the world’s first regulated financial markets infrastructure that leverages blockchain for its central securities depository. SDX has gone live with a fully regulated, integrated trading, settlement, and custody infrastructure based on DLT technology for digital bonds, digital equities, and tokenized Swiss francs.
DekaBank set up the Secure Worldwide Interbank Asset Transfer (SWIAT) platform, which will enable secure and frictionless real-time trading and settlement for all kinds of assets on a global scale across jurisdictions. The platform will be offered through a separate software company, registered by DekaBank, which will start operating as of January 2022 to develop the foundation for an independent, secure, trustworthy, and scalable ecosystem for financial markets. The platform is addressed to all kinds of market participants, also for startups and fintechs. SWIAT has done over 500 Mio transactions and has introduced delivery vs. delivery, which is a new trading type
The London Stock Exchange has delivered a crypto asset Index. In their Innovation Sandbox, they are working on a post-trade settlement infrastructure for UK equities built on Corda. It is largely designed to be asset-class agnostic. Moreover, they are looking to launch a permissioned DLT network, where they are looking to host not only their projects, but also third-party projects to provide managed hosting, full operational resilience, full cyber security suites, custom support, and onboarding.
“The future era of financial instruments and commodities will be created by both existing and new market participants, which will work together on building networks” – Maria Eneva-Olms, Manager at Lucht Probst Associates
The regulatory bodies, together with the market participants will establish the rules and regulations in the new era. We are at the beginning of the new DLT era and can already grasp the huge potential it hides for financial markets and commodities by testing out the first infrastructure platforms and products brought to us.
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