Blockchain: A New Era for Financial Instruments

[Music] welcome everyone thank you for being with us on the second day of european blockchain convention i hope you had a great day yesterday we learned a ton we shared a lot of new insights from the people working in the blockchain industry so today we continue with more sessions i hope you can be as engaged as you were yesterday and i'm very honored to introduce our next session they will cover topics such as commodities financial instruments the new era of financial services so welcome on stage thank you very much daniel and thank you for the invitation and an amazing convention so far uh yesterday was an amazing day i had a lot of fun uh looking and watching the the rest of the sessions and i'm very thrilled to be part of this panel discussion where we're going to talk about the new era of financial instruments and commodities and for this purpose we have four gentlemen from the industry uh and i would like to kick off this panel discussion with a little bit of introduction so a little bit about myself my name is maria anova olms i'm based in frankfurt germany and i'm manager at lpa uh where we develop capital markets and regulatory technology solutions for financial institutions i am also the creator of ledger nation which is a blockchain experts community and we publish interviews about the career paths of blockchain experts and about investing in digital assets so i am extremely passionate about the whole topic of investing and uh investing in digital assets and the future of all types of investment asset classes which is why i'm thrilled to be part of this panel and i would like now to give the word to the rest of the panelists to introduce themselves and maybe in your brief introduction you can also say words about uh how you got into blockchain and when you got into blockchain martin would you like to start okay elderly's first you reckon that's okay thank you robot yes my name is martin willow i run the couple markets business at the board level and the finance business at deca bank deca bank is the fourth largest asset manager in germany we have sort of five million direct and 50 million direct customers and uh we deal with all the savings banks clients as such um obviously not per natural but uh i've had a very good sort of compassionate colleagues about blockchain who got me into it in 2016 ever since i've become a sort of blockchain believer not so much in crypto currencies but into the technology itself which is very very mature and given that we've started with our own initiative called swyatt secure worldwide interbank asset transfer which we're trying to promote because we're going to discuss about this obviously later on but i do think that in order for banks to be connectable we need to go for a joint network because we have to overcome this hierarchical infrastructure which we currently see so i'm very eager and very sort of pleased to be part of this very worthwhile panel thank you very much martin uh i'm very excited to talk about the swyat uh solution as well i watched your uh panel yesterday and it would be great to to uh share the technology and the solution with us today as well so arnold do you want to go next sure maria thank you very much my name is armor peralta i'm head of corporate and business development at atomize ag um i myself started working in blockchain at the blockchain emir center of excellence of teloid in dublin back in 2017 where i consulted different types of clients on what it means to work in blockchain and which impact it has on their organization so general strategy assessments and proof of concepts and that's what i was working on after that i've been working for swisscom blockchain ag swisscom is the largest telco in switzerland it was the first large company that actually started its own subsidiary focusing only on blockchain at least in switzerland since over two years now i'm with atomizers and we are building a digital marketplace for tokenized commodities and for both the industrial world as well as the investment world looking to get price exposure on commodities that they couldn't access through traditional capital market infrastructures wonderful thank you it will be very exciting to hear how you do that and your vision of the future of the commodities market uh dot when do you want to go next from london thank you maria and uh thanks for having me and then nice to meet you all right so uh dutton romini i am a director of emerging technology for blockchain and uh blockchain uh dlt and digital asset architecture and strategy at the london stock exchange group um i've been with the firm coming up to three years now um largely supporting and steering all of our blockchain and dlt related initiatives uh prior to that um i've spent um the last sort of three and a half years um leading kind of blockchain startups professionally so i've been in this space for just over six years now um it's been an interesting ride and yeah i'm really pleased to be a part of this panel today perfect thank you very much and another representative of a stock exchange is david so david please yes good morning or good afternoon um and it's great to be here thank you very much indeed for the invitation maria i do appreciate it so i'm david nunes i'm the head of sdx or swiss um or the sixth digital exchange i've been involved in blockchain uh since around 2014 i was privileged to be on the on the the round table um that led to the ultimately became the working group that ultimately became r3 so that was a very interesting experience for me to be there at the outset um but my direct involvement with um with digital really kicked off while i was at state street um at uh running effort trading and multi-asset class independent platforms we uh we are white labeling our technology to provide uh crypto trading functionality for uh for the industry uh i moved to sdx in 2018 and sorry in october of this year um sdx has been a a significant project in this space since 2018 when sixth group uh made the um the uh considerable statement of intent by uh backing the rollout of a uh of a regulated financial market infrastructure uh based upon uh dlt technology so the csd for uh for digital exchange the central uh securities depository is based upon arthur's quarter dlt technology and in september in september of this year we were the first uh financial market infrastructure provider regulated from a regulated fmi to be provided with a license to operate the csd on dlt anywhere in the world and then in um and then at the end of november this year we issued the first ever digital bond on a regulated fmi um we've also been conducting some very significant and high profile experiments uh with this is national bank and various other participants uh in project helvetii and project europe on the cbdc side of things they're great to be here great david um yeah when i read the news about about the the issuance of the first uh bond on a regulated exchange that was very very exciting so we can talk about this later when all of you can share with us actually the the use cases you're working on currently and what have you already done on the blockchain um so but maybe the first question that we uh we should um start answering is we're talking about the future the new era but how does this new era actually look for you from your perspective so let's maybe first talk about the the new era of financial instruments how this how does this new era look for you maybe david you can start so thank you very much i think it's categorized by a number of things one i would say would be obviously the reduction in the number of trusted parties required to provide services down the value chain as a result of the fact that you can achieve the instantaneous settlement with dlt technology so one of the promises has been that notion of the atomic swap whereby the delivery of the asset and the receipt of the payment is simultaneous rather than the trading happens at the point of that when the matching happens separately to uh settlement and payment so what we have with uh with dlt-based systems like um stx is the ability for that entire t plus two settlement process with all the various intermediary steps and all the reconciliation steps that happen in between to be compressed into an instance one instant step which atomic are indivisible where trading and settlement occur simultaneously which reduces a requirement for you to collateralize with a whether central clearer um reduces the settlement risk associated with that process in the first place and also means that you can take receipt with your funds if you're selling an essay instantaneously rather than wait for two days to actually take receipt of that so there's a massive reduction in risk associated with the compression of that of that process um and addition and in in addition to some significant agility that comes from the fact that you can then manage these assets um in an instantaneous fashion so you can get in and out of these assets and so instantaneously rather than uh other than the weight which i think will uh will drive a revolution in the in the processes depending upon these assets such as factorialization and so on um i think that's one aspect of it i think also we should look i'm sure my my my counterparts in the call here will talk about the adding the additional um elements of intelligence around around an asset so using smart contracts to provide additional uh lifecycle management to uh to an instrument which currently which is currently essentially quite dumb so that ability to to manage things like corporate actions through the pro through the smart contract process in a far more agile and substantial way than we do today which is a very clunky multi-step process again reducing costs and adding functionality and efficiency to the existing system so i think in all sorts of in so many dimensions whether it's trading and settlement or whether it's the actual uh functionality of the instrument itself all the issuance of completely new instruments i think that's going to be something that characterizes this space as we embrace this technology absolutely thank you very much for this um overview of how you see the future of financial instruments martin what is your opinion about the future well it's always the most difficult part to predict the future because mostly you're wrong and i would say like a colleague of mine always said most people overestimate what they can actually do and achieve in a short time but they underestimate dramatically what will happen in the next 10 years and i guess that phenomenon david has really outlined very much so um blockchain is is here to stay and not to sort of go away so it's a mature technology and it's not a question of of how it's going to be deployed but just in what pace that's why our assessment is uh should take the smartphone as a device but also as a technology took 15 years to conquer the world it will take blockchain to be sort of prevalent a lot less time and we believe that this whole idea about doing pox and proofs and all this sort of stuff is gone you just simply have to go for it i mean that's what the sdx has done that's what we have done now because uh clearly in the cross-border settlement that's where you see imminent changes because this seamless transfer of asset will really reduce a lot of risk and will make things more efficient but at the same time i guess um the the value chain itself is sometimes challenged in the financial and capital markets area but however roles will not simply disappear yes we will see some new players but once regulation is fully out there obviously also the some of the dinosaurs will move and i would say that my forecast is in the next five years uh the majority of new issuance for example on the on the bond side will gradually just become digital because it's more effective it's cost efficient and there's so much more benefits obviously currently the regulation is still pointing towards the opposite of really making use of dlt technology because this idea that you only have to have a central register is in and of itself a detriment to the idea of having a shared technology that's obviously something where the the market and the regulators will have to play out but it will be a a key feature and the second major point is and i guess a couple of panels later it's also this is being discussed um there's clearly this element of cache on chain which is something that everybody's looking for and i find it um disappointing that most of the regulators are looking to the retail for example europe this is going totally to me in a wrong direction because why wait five to six years to implement with all the repercussions a retail euro when we could have cash on chain already the german bundesbank for example has a trigger solution which we could easily introduce into rtgs no issue and we would have our existing and trustworthy system but yet we would have cash on chain we also propose another solution which would encompass the capabilities of swift as a messaging system with a digital signature and we could have cash-on-chain immediately this would be probably the biggest game changer and accelerator on the blockchain technology to implement that into the cross border and also the other settlement systems because i believe while we will see a very exponential development of the technology the traditional securities will not just simply go away there's a certain average maturity and we have to convince the decision makers that it is a process where we move gradually and you don't have to spend i don't know 100 million per institution to build everything from scratch on on the green field no it will be an evolutionary process that's why we at deca for example have managed to put traditional securities as we call them on the blockchain and just trade them as a sub custodian very smart way to use the existing system but we've done for example delivery versus delivery what david was just talking about we can do delivery versus delivery we've done it also in external trades with other german banks eliminating that risk so the potential is there and it's got a sort of up to the market participants to really make use of it and hopefully also get the regulators on board and last point um the the swiss are clearly on the forefront in terms of the uh standardized approach to regulation i do see like germany has now also done the same thing with the crypto uh vet papilla gusta so we have just as of yesterday issued our first crypto security for the bearer bond and sold it to other banks we will also see now the selling for funds and lately in the next two years the same will apply for equities as well perfect thank you martin for for your uh overview of the future uh also very interesting points um dot john how do you see it uh thank you mary i i think i would i would absolutely agree with the points that have been made uh so far i think i would just add as an extension you know i think when we look at how the technology is maturing and where the initial kind of use cases of adoption are building i think there seems to be you know a lot of traction when we look at the kind of primary market side and specifically in the private markets you know these are these are traditionally markets where largely you know there's a lot of manual process a lot of paper-based um workflows that have been carried out between multiple organizations across you know the the activities of issuance of an asset capital raising asset servicing and various other facilities ad hoc trading of assets across the ecosystem i think these are really areas where the technology really comes to the fore as a you know a fairly low hanging fruit use case because there is no existing infrastructure and so it's a great opportunity to to develop and grow uh and build new technologies essentially what one would qualify as kind of private markets fmi of the future in a sense to really kind of digitize these this this landscape digitizes workflows and really add efficiency reduce time to markets and then increase access to assets as well hopefully bringing down the costs of some of these activities which then it better enables investors to get in fractionalization is a very interesting opportunity there in terms of being able to increase investor access and some of the larger more liquid instrument so let's say for example you know infrastructure or or large corporate issuances as well and i think you know these are these are interesting areas where we'll see a lot more innovation and a lot of rapid innovation over time because i think the regulatory constraints in and around that landscape are let's say slightly narrower than what you see in the public listed markets where you know clearly we've got csdr we've got mifid we've got you know lots of very rigid regimes that maybe don't necessarily look at or technologies like dlt in in terms of being able to allow it to seamlessly integrate and provide value and without having to navigate some of the constraints that the the regulatory frameworks impose but i think over time we will see that evolution i think we'll see progress from the you know lower end of the liquidity spectrum all the way up to can a large cap public and clearly you know that a lot of that works been pioneered by by groups like sdx in terms of positioning infrastructure within that space and i think over time we'll see a gradual transition um to these new technologies i think the key consideration here though is really one of you know timeline when we think about kind of innovation i don't see a you know rapid revolution of the of the ecosystem i think it will be a gradual evolution you know we aren't in a space given how regulated we are while we can move fast and break things and there are you know natural cycle cycles of of change for large institutions to bring new technologies into their organizations all the way from you know budgeting to build to um operationalization and provisioning and then deployment and then obviously decommissioning of existing legacy legacy systems so there's a lot there i think that needs to be worked through before we really see you know the technology penetrate in anger but i think it will it's it's somewhat inevitable as it's been mentioned previously perfect thank you daughter and um talking about uh the accessibility of the markets uh i i have to think about tokenization because uh tokenization makes it also possible to fractionalize to digitize assets and i would like to give the word to arno uh who is actually an expert in the organization when it comes to commodities and ask him how do you see the future for the commodities market thanks a lot maria the commodities market is very different to what we spoke about just now the financial services market and the major difference is that in the commodities market we speak about large bilateral deals between mining companies and between manufacturing companies so most of transactions are happening in the industry these are not standardized deals these are deals where large companies have um you know multi-year contracts um that have been developed over time so it's really hard to you know bring this industry into a more digital and standardized world and that's a key characteristic um is this bilateral really illiquid market especially for the financial services world to enter and to participate in such deals for the creation of neo as an example exchange to it product exchange really commodities so that's one characteristic the other characteristic is um everything around the sourcing and the supply chain so this industry is working almost like 20 30 years ago so we are in in in exchange on a daily basis with those large companies who are doing commodity transactions um over atomize and they work mainly over phone with contracts they send their proposed and excel sheets um so proper commodity trading like in the old world and and this is something where another kind of key characteristic is to bring you know new efficiency through digitization this can be with blockchain or not but it's just simply this transfer and to a new environment of how trades are being managed and the last characteristic of this market is that it's not regulated it's a really untransparent market right so um as a manufacturing company of cars as an example they have a really hard time to prove where the model is coming from esg credentials and so on so this is something that is putting a high pressure on this industry and all large commodity trading firms are looking into enhancing their products enhancing their contracts with additional key information that is demanded from their clients and at least from the end consumer that wants to really invest in a sustainable way in a car as an example not just looking at it runs with battery but actually the catalysator has metal which is coming from uh from you know from a sustainable area so these are the key the three key situations in this industry now if if you talk want to talk about the future how can you change that industry that's obviously a huge task right because you also have physical goods and not just financial products right that you need to make sure that those are correctly you know digitized um to make sure that this digital product which flows through the supply chain um from the mining firm down to the end consumer actually doesn't lose this physical connectivity um so that's that's one bigger challenge the other challenge is obviously to bring you know new market participants to use such a new technology um but we are getting there there's a big interest to move in this direction from the industry and what we are seeing now emerging and i think that's the kind of the future characteristic are smart products now we always speak about smart contracts but now we're moving i guess in the area of smart products i think also david mentioned it before where you can add not just product characteristic but also corporate credentials corporate insights corporate data into a product and you can make that tradable right through fractionalization um that was mentioned before and you can allow illiquid products also to move into a more liquid market through standardization of the contracts which are currently bilateral and then efficiency obviously is a topic uh you know for um this intermediation because currently if you look at the value chain of products being mined moving on to a financial product you have more than 10 10 companies involved right and through this intermediation you allow direct ownership of access coming out of the ground which is revolutionary for the financial in terms of financial products because now as an investor you can invest directly not just in the stock of the mining company where you have several risks associated to a company right a company could robust a company could there are many things that you know economic risks around it mining companies but if you invest now in the real asset that the company is producing that's a completely different uh different topic so yeah i think the two worlds start to merge a little bit you know the commodities market which is a little bit on the side and the financial world now while things become digitized you can create different types of bundles of product products related to commodities and that's going to be exciting absolutely thank you arnold for this explanation of the differences between the two worlds and how they're going to merge and how you see the future of the commodities markets um now we spoke about the future a lot but you all all of you mentioned uh regulation and i think regulation is something that um is still in progress and this is one of the prerequisites in order for this future to happen so let's talk about what has to happen in order for us to arrive to the future and i think regulation is definitely a big part of it um we can talk about that and also what else has to happen so um david do you want to start with your vision yeah sure absolutely i think uh one of the challenges that we have okay so an observation which is not unique to me is that you know what we're referring to here in terms of these technologies whether it's dlt or whether it's uh instead of cryptocurrencies and digital assets is this is this the revolution of the internet of value right so we move from um for this concept of the 1995-96 sort of internet of information um a revolution which uh has been observed that that kind of that technology emerged into a into a kind of regulatory desert there wasn't a vast amount of sort of of of of sort of legalism or regulation around that that was going to be an impediment to the adoption of that technology and that's one of the reasons why i think that it the adoption was so rapid um across the board by the way sort of retail or whether it was um or whether it was sort of the commercial aspects of um of adoption uh the internet of value is emerging into into an area of extraordinary regulatory sort of density um obviously it's because now we're talking about money um and uh and therefore that's a highly regulatory regulatory um sort of sophisticated and extensive regime um so everything that we do is is going to be within the within the constructs put together by regulation and those constructs have stood the test of time very well from and sort of have been optimized sort of since the uh i suppose the situation we have now is is from the 80s onwards but therefore shoe horning this technology into a 1980s 1990s style regulatory regime is somewhat of a challenge so so uh and as and as martin alluded to i think switzerland is is a is sort of leading the way when it comes to providing clarity around that so as a sort of foundational foundation of an environment ensuring that your regulator is is engaged um with the industry and exploring these technologies with a reasonable degree of aggression given that i think that this work this is differentiated to well it is something which will differentiate uh states is how effective their regulatory regimes are when it comes to this particular technology i think that's kind of key so at sdx you know we certainly uh consider our relationship with finland to be uh to be you know absolutely essential both in terms of us understanding what their what their requirements are and also acting as an opportunity to educate them about the possibilities and the the benefits and also the um the the uh the answers to some of the benefits of technology but also how it addresses some of their concerns um that that that uh so and i think that leads to part two to my to my answer which is that adoption of this technology is is is challenging because it's also emerging into um an area where there is a significant amount of well there is a highly optimized existing infrastructure so for the for in the financial services sector we will it'll take some time um i think i think martin's sort of time horizon of around 10 years is probably it is probably accurate for the industry to migrate um to this new infrastructure because there is an existing infrastructure that supports the existing uh processes and technology that exists today and for a long time that will be where the majority activity takes place so there is a a bit of a challenge both around adoption which is that it's because it's going to cost the industry money to adopt this new technology in the short term because the amount of activity that's been conducted over the new infrastructure will be a fraction of the old infrastructure but it still requires this you know it still requires apparel infrastructure to be in place so one of the things that i think that um participants like sdx and and my colleagues on around the core here are um are sort of it's our responsibility to provide uh use cases and national and ecosystems in which parties can come together and learn how to actually leverage this technology and justify the expenditure of the of their investment in the technology by having more and more effective and provable use cases that exist in the industry so that's going to be what's going to propel this forwards and generate momentum will be i think more initiatives as martin mentioned as well i think a very clear a very um salient observation is that we must move from pocs to real-world implementations that's pretty much what's happening now and i think at sdx we have a very clear example of that so real world examples of the benefits of this of this technology but also um add the opportunity for participants in the marketplace to get to grips with it and build up internal competency and also build that infrastructure to support activities not just on sdx on other uh other genuine production use cases that leverage blockchain so that there's a so what we need is momentum by having more of these production systems go live but always with the awareness that unlike simply the adoption of a fintech uh disrupted disrupting technology solution this is a um this is a much more broader base kind of a a revolution it's not simply a point sort of improvements around certain aspects of financial services this is a this is a this is a a move an evolution from the traditional ecosystem environment infrastructure to a completely new infrastructure so that's going to take much that's going to take a different set of there are different ways of interact interacting between participants so more partnerships more collaboration um and i think by almost by definition it's distributed ledger technology it requires um the sort of a consortium mindset in almost you know in almost every context that's it's sort of built into the dna of the technology right that's a bit of a different approach to how we used to do things in financial services where we would see each other very clearly as competition or partners or customers um that now you know if ever there was a case when we were all in it together um it's uh it's when it comes to the embracing of this new technology david absolutely this last point you said um i have to say something that i heard yesterday during another panel discussion at the european blockchain convention a gentleman was saying that currently financial services institutions are building islands so they're developing their proof of concept on an island but we have to think how to integrate these islands or how to make them um work together this interoperability between these islands is the next challenge we have to work on because everyone is working yeah and i think they're actually having production ecosystems and i do and i know it's a horribly overused word in technology everyone gets very excited about the word ecosystem but i think it's entirely appropriate in the case of distributed ledger here is an ecosystem that sdx has now deployed that enables you know a distributed ledger to be adopted by its participants ultimately they're built to build applications off of those dlt nodes themselves directly so actually we'll build out more functionality that will be essentially not within sdx's sort of purview in the in the long run it'll be entirely offered it'll be innovation that's being spawned by the fact that this technology is now made available in production but that ecosystem also is like also capable of supporting things like um central bank digital currencies and that's where the projects that we've been um actively involved in as a technology platform with the national bank bank of france um with europe and helvetia really proves that the case that it's not it's so when you actually have the ability to tokenize um fiat as we do to support the platform of the sdx technology today for the instant swap that means you're one step away from being able to tokenize central bank digital currencies and actually being a platform for issuance of cdbc's which is an obvious adjacent use case to our primary uh function as um as a stock exchange and a csd so now we're a stock exchange of csd and a platform for issuance of cdbc's so you can see how these things sort of wrap up to wrap that they really kind of rack up as use cases when you begin to deploy this in production and stop having those sort of siloed poc sort of scenarios um so yeah absolutely breaking that breaking that out into the production the real world and allowing the sort of the the the opportunities and the use cases to flourish in that context i think just just just to add to those points actually i think this is a really important topic of discussion i think as you move into the longer term of adoption of the technology i think the problem extends broader you know when we think about we look across the landscape you know some of the dlt initiatives are being led across you know across different regions and i think um you know david's point around cbdc is even more more of a vital one i think there's probably something of an innate expectation that cbdc's will likely be delivered across separate and distinct infrastructures and that's separate to maybe you know other infrastructures that may be supporting specific digital asset use cases within the same domestic market and so you know really there's an expectation that over the longer term in order to really um yield the value and bring critical mass of the infrastructure we need interoperability at a scale you know that you know we're not really thinking about at the moment and it's going to be super important when we think about and make considerations around for example investor access into these assets if we look at the digitization of private markets i think is another great example today there is no technology impediment or not really a technology impediment for an investor to invest in an asset you know within another jurisdiction there are process and regional and compliance and legal considerations but there are no technology impediments but there will be in the instance where we have you know domestic infrastructures and fragmented infrastructures and so you know these are all problems that the market will need to solve and it will take i think to david's point much collaboration across the board to really bridge all of these technologies together it will take standardization that will take you know a lot of work really to kind of br bring this massively interconnected network of networks which i think is realistically where the market's going to go as opposed to let's say a one dlt to to rule them all well david i guess david and gotten basically sort of set all the buzzwords but maybe to to also point it out even more clearly i actually would need a sort of change of mind what do i mean by that having been in capital markets for 35 years into banking it's always this idea i'm smarter than the other one or i can outpace you and actually i have this differentiating xyz and hence i'm gonna be more successful than others in the market and this is not the way that you're going to really achieve joint efforts and that's not the way that you're going to achieve standardizations so the comparison with the islands is probably very true in terms of all the different proofs and parks and the colleague of mine from the large u.s bank says well i currently have 60 pucks and you sort of say forget about all of them because yes you can literally put anything on the blockchain it's just the question in which setup and here i guess the biggest challenge is for decision makers to agree that we need more or less but we've got to get rid of our fear and have a new open mindset so an ecosystem that has an open ap