Distributed ledger technology (DLT) has the potential to create new asset classes and bring efficiencies to existing processes, attendees of an online conference were told. However, challenges around risk management and regulatory compliance need to be addressed.
Those were some of the views exchanged when seven industry experts from domains including legal, banking and digital platforms convened on Wednesday 18 October 2023, to discuss the intricacies of DLT within the financial sector. The roughly hour-and-a-half-long webinar, organised by Luxembourg for Finance, was moderated by Chris Hollifield, the head of business development at LFF, and Emilie Allaert, head of the Luxembourg Blockchain Lab.
During the conversation, Hollifield highlighted the potential of DLT beyond just cryptocurrencies, pointing to its versatility within the financial sector, especially in security services. He cited the emerging applications of DLT in digital assets, tokenisation and security tokens. According to Hollifield, these technological advancements could either create new asset classes or refine existing processes.
Hollifield referenced a report from Citi estimating that the market for tokenised digital securities might reach an impressive $4trn to $5trn by 2030. This prediction underscores the financial sector’s burgeoning confidence in DLT. Reflecting on the 14 years since Satoshi Nakamoto’s inaugural bitcoin transaction, Hollifield pondered whether DLT would be recognised as a matured technology by 2030. He also addressed the dynamics following the FTX collapse in November 2022 and the subsequent introduction of Markets in Crypto-Assets Regulation, drawing attention to exchanges like Bitstamp.
Jack Ehlers, the chief operating officer at Bitstamp, shed light on the challenges faced by the institutional trading business post-FTX. He indicated that the primary concerns of institutional investors centred around risk management in the still-evolving crypto industry. Ehlers differentiated the priorities of traders, who focus on technical performance and risk, from those of investors who are more intent on establishing a solid investment thesis. Ehlers also highlighted the development of the off-exchange settlement network over the past year, which offered investors an alternative to holding custody on exchanges. For both traders and institutions, pricing continued to be pivotal.
Discussing decentralised finance, Ehlers opined that it might not yet be primed for widespread adoption. However, he acknowledged its undeniable potential, particularly in relation to institutional investors and compliance aspects like anti-money laundering on decentralised exchanges.
Hollifield, delving deeper into DLT’s role in security services, mentioned the digital native bonds issued by the European Investment Bank as a case in point.
Steve Jacoby, regional managing partner for continental Europe at Clifford Chance, delved into EU legislation concerning crypto assets. He elaborated on the DLT pilot regime, designed to boost the trading and settlement of DLT financial instruments by tackling existing legislative challenges. Jacoby emphasised the importance of national laws of EU member states in governing these instruments. He lauded Luxembourg’s approach of amending three existing blockchain laws, thereby ensuring that DLT could fit into the current legal framework while accommodating technological advancements.
In a nod to Luxembourg’s foresight, Guglielmo Manzoni, head of depository and fiduciary services at HSBC Continental Europe, introduced HSBC’s Orion digital platform for tokenised assets, launched in Luxembourg in February 2023. This decision, Manzoni clarified, was influenced by Luxembourg’s evolving blockchain regulations, with laws implemented in 2019, 2021 and 2023. Manzoni cited several advantages of DLT platforms, including faster settlements and cost reductions. He posited that DLT should be viewed as a progressive step that augments intermediary roles.
Biba Homsy, founder and partner at Homsy Legal, a blockchain and crypto specialised law firm, shed light on the implications of tokenisation for issuers, underscoring the importance of topics like intellectual property and privacy, and lack of a ‘common standard’. Both Homsy and Manzoni concurred that the principles governing digital assets remain consistent with traditional financial tools.
Looking ahead, Homsy showcased her optimism, bolstered by positive indications from Europe’s pilot regimes, while Manzoni envisioned a future where DLT and conventional systems coexist harmoniously, facilitating operations across an array of asset categories.
The discussion progressed to central bank digital currencies and institutional DLT applications, featuring insights from Scott Lucas, head of markets DLT at JP Morgan. Lucas prioritised the ‘precision of settlements’ and ‘cost-efficiency’ as his primary areas of focus.
Allaert steered the discussion towards the tokenisation of tangible assets, also termed off-chain assets or real world assets, engaging with Luc Falempin, chief executive officer at Luxembourg-based Tokeny and Nicholas Garcia, CEO and founder of FortunaFi.
Concluding the session, Falempin succinctly described tokenisation as a method to represent assets on a blockchain, emphasising that “technically, you can tokenise anything you want,” whether it’s a financial asset or a purely digital ‘native’ asset. Both Falempin and Garcia stressed that quality asset-backed tokenisation will not only gain traction in financial markets but will also achieve widespread adoption in various sectors in the foreseeable future.