India’s best minds are talking about transforming securities markets by embracing digital assets. In simple words, digital asset means assets in digital format. To further decode the concept: Ownership of any valuable asset that is tangible (such as a stock, bond, cash, real estate) or intangible (such as carbon credits) can be represented in a computerized or digital format. This transformation is enabled by signaling that uses software codes to convert ownership rights into digital signals. These records are stored and managed through blockchain technology or distributed ledger technology (DLT) where ownership records are kept securely.
This same technology underpins the world of cryptocurrencies which have proven to be more cost-effective in terms of infrastructure compared to traditional operating costs incurred by stock exchanges, clearing corporations and depositories. Let’s clarify how crypto markets use technology. Firstly, transactions are decentralized, ie they rely on computer networks (called nodes) to validate and record transactions. Second, smart contracts (ie self-executing coded contracts) automate various aspects of the trading cycle. Third, peer-to-peer transactions could reduce business-to-business transaction costs, improve transparency and reduce the latency or waiting time between transactions. This also allows individuals from other parts of the world to transact without barriers.
In short, DLT allows peer-to-peer transactions, eliminating the requirement of traditional intermediaries such as banks, clearing corporations, etc. The goal here is not necessarily to eliminate these intermediaries but to improve transaction efficiency and cost-effectiveness through the adoption of digital assets. and technology. DLTs can streamline processes, make transactions faster and more accessible, and increase aspects of transparency and security in financial transactions. DLT could complement and enhance the role of intermediaries, enabling them to adapt to the digital landscape and benefit from reduced costs and create innovative solutions. Another benefit of recording assets on DLT is that it allows for real-time tracking of ownership.
However, the downside of such a system is that it would eliminate netting from the system, ie all client transactions would have to be fully funded and settled. Also, it is important to acknowledge here that fraud and disputes are potential threats to this system so we must adapt and innovate wisely to mitigate these risks. Furthermore, decentralized market infrastructures may not provide the same level of accountability as current clearing corporations.
Market infrastructure institutions in the US, Hong Kong and Singapore have already recognized the benefits of adopting these technologies. Project Guardian is a pilot project initiated by the Monetary Authority of Singapore (MAS) in collaboration with traditional financial institutions and fintech companies aimed at testing the feasibility of digitizing financial assets, signaling and policy developments. Various financial institutions are exploring the creation of various financial assets (fixed income products such as bonds, forex and wealth management) and their subsequent listing on stock exchanges as well as clearing and settlement through digital asset networks. Japan’s Financial Services Agency (FSA) also joined this project. Additionally on September 6, the Monetary Authority of Singapore granted a license to Asia Next – the digital asset exchange. On October 19 the US DTCC (Deposit Trust and Clearing Corporation) signed an agreement to acquire blockchain-based fintech firm Securrency Inc – to drive the development of the post-trade infrastructure for the global financial markets. Here are some of the pioneering approaches taken by regulators to encourage the adoption of digital assets.
A four-pronged approach to facilitate the establishment of a digital asset regime includes DLT, tokenization, central bank digital currency (for the payment aspect of a security arrangement on DLT-based trading centers) and potential players. India already has the necessary technology, what is needed is its effective use. Advances in digital currency initiatives are already underway, making this transition viable and there are many fintech players available to help realize this potential. Another essential area of focus is to address regulatory reforms to pave the way for the realization of digital assets in India.
Rasmeet Kohli is with the National Institute of Securities Markets. The opinions expressed in this column are personal.
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Updated: 31 October 2023, 09:26 PM IST
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