THE SUMMARY: CSDs the new opportunities created by the tokenisation of financial assets on blockchain-based networks

SUMMARY OF CSDs WEBINAR APRIL 8 2021

SUMMARY

The security token markets will grow exponentially, once the legal and regulatory frameworks are in place in the major financial centres, and pioneering issues are seen to be a success.

CSDs will be seriously affected by a shift from current debt and equity markets to tokenised alternatives.

Emerging market CSDs are excited by the possibility of attracting new business from domestic and foreign users, while developed market CSDs find sub-custodian banks pressing them to be ready in case network managers start to invest in tokens.

CSDs that offer end-investor accounts are sceptical about tokenisation bringing issuers and investors any closer.

Since tokenisation is beginning with illiquid asset classes (such as real estate) CSDs are confident they can develop security token services in parallel to their existing securities services.

Not all CSDs have the resources to invest in the development of parallel services, thanks to the downward pressure on fees exerted by sub-custodian banks, even though tokenisation threatens CSDs with extinction if they do not adapt.

CSDs nevertheless have options. One is to settle for acting as governors of permissioned security token networks. The CSDs would vet potential members of the network, and discipline participants that break the rules.

A more radical option is to increase revenue by disintermediating the sub-custodian banks, but it is risky. One variant is to insist the account-holders take on more of the work they do, especially in labour-intensive service areas.

A third option is to combine governing token networks with an unbundling of all their services, allowing CSDs to offer their users best-of-breed portfolios of services supplied by third parties they select, admit to the token networks, and supervise.

Regulators are encouraging CSDs to innovate by bringing securities tokens (in some jurisdictions at least) within the scope of securities laws and regulations.

One factor in regulatory thinking is the increased risk of centralised data repositories, which distributed tokenisation networks can mitigate.

Though regulators and central banks wish to preserve the investor protection and operational resilience conferred by existing financial market infrastructures, their growing enthusiasm for central bank digital currencies (CBDCs) indicates they see tokenisation as enhancing efficiency.

For their part, tokenisation platforms are embracing regulation, because it widens their appeal to institutional issuers and investors, and should give them access to CBDCs.

The securities and security token markets are converging and CSDs can assist the process by providing mechanisms at the post-trade level which allow tokenisation platforms to inter-operate with each other and with traditional securities markets.

Questions to be addressed at the next CSD discussion
1. Are new issues of security tokens moving beyond illiquid assets?
2. Will CBDCs enable security token platforms to settle trades in central bank money?
3. Which CSDs have made decisive moves in response to the threat-cum-opportunity of security tokens?
4. Are CSDs developing security tokens in parallel with existing services or as an integral part of them?
5. Has any CSD expressed interest in governing permissioned token networks?
6. Has any CSD expressed interest in orchestrating the provision of post-trade services on a permissioned token network?
7. Are custodian banks supporting or hampering the efforts of CSDs to adapt?
8. Has any CSD expressed interest in using tokenisation services to move beyond the financial markets into adjacent industries?

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