Blockchain in financial services

Picturing the digital assets momentum, framed through a European lens

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cafe laptopThe birth and rise of the Bitcoin cryptocurrency paved the way for several waves of innovation that are gradually shifting paradigms in the financial ecosystems. The digital asset momentum, empowered by tokenization and underpinning blockchain technologies, is now undeniable.

Amongst the recent milestones that made the headlines; the ever-growing rise of Bitcoin value, the incredible resilience story of hacked and returned tokens in the Poly network, and the inclusion of so-called “Fan Tokens” in the transfer package of star footballer Leo Messi to Pari Saint Germain.

What is probably less mediatized, but still worth noting, is the continuous growth of the Decentralized Finance (DeFi) ecosystem — currently nearing USD 100 billions of “locked value”, according to Defipulse.

The overhyped Initial Coin Offerings (ICOs) in the early days of smart contracts-based innovation and the speculative behaviors around cryptocurrencies — like the crypto-investor’s notoriously misspelled term HODL, referring to buying and hoping to see the asset value multiplied by 100 times — are just the tip of the iceberg. The same innovation technologies that powered the rise of cryptos promise to change the financial sector in a profound way.

Learn how digital assets increase security and scalability for faster settlements

Underneath the surface, advanced finance instruments for digital assets are emerging. These instruments are fueled by the programmability of smart contracts, allowing them to mimic what happens in the regulated world of cash and securities: funding, lending, borrowing, trading, derivatives and even automated liquidity market makers.

These initiatives are not yet mainstream — my own notion of mainstream is when a trend is being adopted by my digital-savvy friends and family. However, some of these trends introduce disruptive business models and new governance schemes that can potentially trigger major shifts in the regulated financial ecosystem.

The shift in regulated financial ecosystem

Several commercial and so-called custodian banks have not hidden their interest in supplementing their core securities services with new offerings focused on digital assets, ranging from issuance to depository and servicing.

Besides that, experiments are on-going in the central banking area, suggesting a growing interest in Central Bank Digital Currencies (CBDC). The latest market signal comes from the European Central Bank (ECB), launching a 24-month investigation phase around digital euro and focused on the retail space.

Prior to that, the French national central bank (Banque de France) launched an ambitious CBDC experimentation program in March 2020, triggering eight different workstreams focused on wholesale money markets — limited to companies and financial institutions for large amounts.

Many domains of digital assets are deeply interlaced: securities settlement and payments in the real world might represent two legs of the same operation lifecycle. For this reason, it is expected that innovations concerning one dimension (like cash) could eventually trigger further alignments in contiguous spaces (like securities).

This was demonstrated in the Euroclear initiative in the context of Banque de France CBDC program, involving IBM as the technology partner and featuring the entire ecosystem involved in post-trade operations of French Government Bonds, including:

  • Agence France Trésor as the issuer, reporting to French Ministry for the Economy, Finance and Recovery
  • Banque de France, as the CBDC issuer and AFT bank
  • Euroclear, as the Central Securities Depository
  • BNP Paribas, Societe Generale, Credit Agricole CACIB and HSBC, as the primary dealers

Check out the full report, Experimenting settlement of French government bonds in Central Bank Digital Currency with blockchain technology, and watch the short video below for more information.

The limit between the former world and a more decentralized one is more and more blurred, if you consider the recent “Pilot Regime for market infrastructures based on distributed ledger technology” introduced by the European Commission in March 2021, which exempts “small” issuers (below EUR 200 million) and bond issuances (below EUR 500 million) from certain Central Securities Depository (CSD) requirements in order to preserve the promise of decentralization induced by blockchain technologies.

From Bitcoin to DeFi

The rise of cryptocurrencies has been, and is still, a topic of conversation for a niche of passionate “geeks” (like me), but the traction that I see from the regulated financial world, through the exposure of our industry and technology consulting activities, shows that the potential of digital assets is reaching another dimension.

The current experimental phase might give the perception that the horizon for change is still far, but the change has already started, and the financial ecosystem is already working on the premise of the major transformation. The question is no longer “if”, but “when”.

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