Bridges to Develop Between Traditional, Digital Assets
The next few years are expected to bring increased tokenization and the building of bridges between traditional and digital assets.
Martin Weithofer, digital securities – sales EMEA at SIX Digital Exchange, said: “Building bridges between digital and traditional assets will be an interesting development over the next two, three to four years.”
Weithofer spoke on a panel hosted by FIX Trading Community on the Evolution of Platforms and Technology on 13 July.
He continued that another trend will be tokenized cash which has a lot of use cases, such as for collateral of crypto derivatives.
SDX, which was built with blockchain technology, launched in November last year with the issue of the world’s first digital bond in a fully regulated environment.
Alisa DiCaprio, chief economist at R3, which builds blockchain for regulated financial institutions on its Corda platform, said on the panel that she expects to see an expansion in the type of digital assets in the market.
“It is unclear which tokens are going to be successful but they will continue to expand,” she added. “Interoperability is also going to move much faster.”
Basu Choudhury, head of partnerships and strategic initiatives at OSTTRA FX & Securities, an operator of networks in the wholesale derivatives market, said on the panel that his pipe dream is see a peer-to-peer market in repo and securities lending built on DLT – but that is five to 10 years away.
“That is the Holy Grail,” added Choudhury. “That is the power of DLT and what it could bring to the financial markets.”
Choudhury does not expect intermediaries to disappear but said financial market intermediaries are evolving.
“You don’t need a single provider as the participants in the digital asset network validate and confirm that single source of the truth,” he added. “There will be a lighter-touch FMI than you’ve traditionally seen.”
SDX is the world’s first fully regulated digital asset exchange and central securities depository and Weithofer said the venue wanted to offer an integrated trading, settlement, and custody infrastructure based on distributed ledger technology. He said mitigating settlement risk is one of the obvious efficiency gains as SDX uses atomic swaps where settlement which only takes place if trades are pre-funded so both the securities and payments instantaneously exchanged.
“Having digital stocks and bonds on DLT creates the possibility of creating intelligent securities which contain data, such as, ESG or corporate actions,” he added.
Choudhury said that in traditional markets institutions use credit intermediation and interesting work is happening in digital assets to develop this functionality.
Weithofer continued there are many experiments and innovations in digital assets that are likely to find their way into the traditional space.
“At the moment there are different islands and we could build bridges between them” he added. “Maybe, in a couple of years, we will see digital native products and non-digital products combined on one platform.”
Choudhury continued that FIX messaging is important in traditional securities and so can offer standardisation and a bridge between the old and the new asset classes.
Laurence Jones, co-chair global post-trade working group & Americas regional director at FIX Trading Community moderated the panel and said FIX has a lot of crypto providers already using FIX messaging, particularly for execution.
“When the post-trade process is fully defined it will need to be some level of FIX messaging,” he added.
Jones continued that FIX is due to launch some standards for the digital asset space.