What custodians and CSDs are really doing about blockchain
The custodian banks and central securities depositories (CSDs) that make up the global securities services industry are understandably intrigued by institutional investment in crypto-currencies, disintermediating experiments in the Decentralized Finance (DeFi) market and the looming possibility of exponential growth in security tokens.
Each of these developments is rich in promise, but also threat, and one person who knows how the custodians and CSDs are responding is Vivekanand Ramgopal. That is because he is vice president and head of TCS Financial Solutions at Tata Consultancy Services, whose TCS Bancs securities processing platform is used by dozens of custodian banks and CSDs. Significantly, Vivek also heads Quartz, a new set of blockchain-based services to support investment in crypto-currencies and security tokens. He spoke to Future of Finance co-founder Dominic Hobson.
Questions that are being asked
- On what blockchain projects (as opposed to POCs or pilots) are you working with CSDs at the moment?
- CSDs have been relatively slow to respond to crypto-currencies and security tokens, if at all. Is that a sensible strategy on their part?
- What part has the experience of ASX with blockchain technology played in conditioning CSD attitudes towards tokenisation?
- Is there a greater willingness on the part of any type of CSD (e. g. emerging market CSDs) to experiment with tokenisation?
- Do CSDs have the budgets to invest in security token services?
- Are CSDs held back by their users? Could they start to service the buy-side and/or their global custodians directly?
- If security tokens are issued into and custodied in a digital wallet controlled by the investor or a third-party service provider (such as a custodian bank) are CSDs still necessary?
- How would you advise CSDs to evolve their offering to accommodate security tokens, e. g.:
- offer digital wallet custody services (choice of omnibus or segregated wallets?);
- act as transaction validators;
- act as governors of permissioned networks;
- orchestrate provision of services by independent but competing providers on token networks (even continuous auctions of, say, settlement, stock loan, collateral management etc.);
- run KYC, AML, CFT and sanctions screening checks;
- facilitate interoperability between security token networks and between security token networks and traditional securities markets; and
- expand into adjacent sectors (insurance, retail banking, retail investing) or other data repository tasks (e. g. digital identity, educational credentials)?
- Is the registration function of CSDs doomed whatever happens – or is the continuously updated, real-time register promised by blockchain actually an opportunity for them?
- Are CSDs being pressed by their users (domestic and/or foreign sub-custodian banks) to act?
- Standards would help with inter-operability between token markets but (a) CSDs have paid lip service to ISO 20022 but not necessarily adopted it wholeheartedly and (b) sub-custodians have pressed CSDs for years to standardise their interfaces (on SWIFT) without meeting total success, chiefly because of their domestic client bases. Will that not inhibit them adopting emerging security token protocols and technical standards such as FINP2P, DTI 24165and BSI PAS 19668:2020?
- Does a tokenised marketplace still need business or messaging standards (as opposed to technical standards or computer protocols)?
- Most securities services engines run on traditional standards (SWIFT, FIX, fpML). Is this an obstacle to adoption of security tokens or can it be overcome by adaptation of the existing standards or the use of translation tools?