Seamless integration required to bridge digital, traditional assets

With Natacha DezertBlockchain & Digital Assets Program Manager and Aman MethaSales Director and Digital Assets Lead, Asia Pacific, BNP Paribas Securities Services

The digital landscape has recently started to mature, expanding beyond cryptocurrencies and their underlying technologies to include other assets. It now includes other assets such as security tokens, which have a much tighter alignment with institutional investment mandates and fiduciary obligations. The global ecosystem of digital assets hit $2.1 trillion in Q4 2021 — more than the GDP of Italy or Canada.

Amidst this evolution, providers need to minimize the impact of an extended transition period in which traditional and digital assets coexist without being integrated. Financial intermediaries that can offer a seamless and consolidated service for these assets will be well positioned.

Natacha Dezert, BNP Paribas Securities Services

In a recent podcast, Digital Assets: Global Trends for Institutional Investors, with Senior Writer Shanny Basar of GlobalTrading, Natacha Dezert, Blockchain & Digital Assets Program Manager at BNP Paribas Securities Services, described how she sees growing interest and participation from institutional clients . These mainly come from asset owners and asset managers looking to invest in digital assets and integrate them into their portfolios, as well as companies and issuers interested in tokenization.

Dezert said, “These actors are moving from proof of concepts to live experiments of increasing complexity to confirm expected benefits and prepare their organizations for the future.”

In fact, a 2020 Organization for Economic Co-operation and Development (OECD) report titled “Asset Tokenization and Potential Implications for Financial Markets” hinted at the growth of asset digitization, adding that “blockchain technology is enabling it.” Has potential to challenge the current construct of financial markets, affecting infrastructure and participants alike.”

Aman Mehta, sales director and digital assets lead at BNP Paribas Securities Services in Asia Pacific, told GlobalTrading that he believes that with increasing focus on digital assets from institutional clients, traditional and digital assets will eventually co-exist and each have their own value will bring.

BNP Paribas Securities Services aims to create interoperability between different distributed ledgers by building services on top of them to provide value to clients, while continuing to invest in capabilities to support traditional assets.

“Our mission is to provide our clients with an ecosystem that allows them to easily access and hold such assets,” Mehta added. “We work hard with market infrastructures, exchanges, fintechs and our clients to bridge the gap between traditional and digital assets. We are considering building a platform to connect with powerful solutions for the emerging digital landscape.”

Aman Mehta, BNP Paribas Securities Services

A May 2022 report by consulting firm Oliver Wyman, “Navigating Crypto: How Banks and Other Financial Intermediaries Can Integrate Crypto Assets,” states that there is a near-term opportunity for banks and other traditional intermediaries to meet their customer base’s demand for digital assets alongside traditional ones to satisfy assets.

“As digital assets evolve, banks and other intermediaries that assume this role will become core members of the digital asset ecosystem and will be well positioned to bring other digital asset innovations to the mass market, potentially including DeFi (decentralized finance) loan pools. . , stablecoins or central bank digital currency (CBDC) denominated transactions or NFT wallets and marketplaces,” the report reads.

Dezert said that digital assets have intrinsic properties compared to traditional assets (programmability/smart contacts, ownership/data stored in a decentralized digital ledger shared by counterparties, rather than multiple private ledgers maintained by different intermediaries be) which she sees as great opportunities to bring efficiencies and improve existing models and services.

She went on to say that a few years ago, BNP Paribas Securities Services began experimenting with blockchain and digital asset proof-of-concepts to gain hands-on expertise and knowledge; Adaptation of controls, procedures and processes and preparation for the new asset classes in close cooperation with clients, counterparties, market authorities and regulators.

“We have laid solid foundations and built capabilities to provide digital asset services in a number of areas: as a custodian to manage our clients’ wallets and private keys, and as a custodian, fund manager and transfer agent for our clients’ assets managers/asset owners.”

“We are also very active in cash-on-chain, participating in central bank digital currency programs and a commercial bank digital currency initiative,” she added.

TECHNOLOGY

In 2020, the OECD predicted that the rollout of large-scale asset tokenization would face several challenges related to the underlying technology itself, while ensuring interoperability between different networks to enable connectivity between markets .

Oliver Wyman supported this, noting that banks and other financial institutions need to put together a technological infrastructure to capitalize on digital opportunities either internally or in partnership with multiple service providers.

BNP Paribas Securities Services responded that it was important to partner with fintechs specializing in digital assets to offer clients the best of both worlds.

Recently, BNP Paribas Securities Services selected two major fintechs – Fireblocks and METACO – to develop their digital asset custody offering and help clients efficiently and securely issue, transfer and hold regulated digital assets. These partnerships position both banks and custodians as a one-stop shop for clients, offering seamless, consolidated services across asset classes and minimizing the impact of clients having to manage traditional and digital assets side-by-side. “Fintechs have the technological knowledge and expertise and allow us to connect to blockchains in a very fast-moving environment in an agile and flexible way, while having the expertise and credibility in the areas of regulation, compliance, risk management and the knowledge and understanding of our customers have. needs and their trust,” said Dezert.

“However, significant barriers to wider adoption of digital assets remain, including the current lack of technological standards, lack of interoperability between the different blockchains, and the lack of widely used and accepted on-chain payment and settlement means,” she said.

The Oliver Wyman report went on to say that service providers will be the primary way banks and other intermediaries access digital assets, as this reduces the complexity and overhead of developing in-house capabilities and reduces administrative burdens.

REGULATION

Regulations are a prerequisite for the development of digital asset markets.

The 2022 OECD report found that “Policymakers play a role in ensuring that token markets are consistent with regulatory goals of promoting financial stability, protecting financial customers and ensuring market integrity.”

“Possible gaps in existing regulatory frameworks need to be identified and addressed, and regulatory and legal ambiguities related to asset tokenization need to be addressed, as a stepping stone for the safe development and use of tokenization by market participants.”

Dezert agreed that regulators are now intensely focused on digital assets, with legislation such as the European Union’s MiCA (Markets in Crypto Assets) regulation aiming to provide harmonized rules across the region.

Dezert also told GlobalTrading that BNP Paribas is focusing its efforts on digital assets within a clear regulatory framework that allows it to offer services to clients with the required level of security and protection.

Mehta added that the Asia-Pacific region is more fragmented than Europe or the US, so there is a race between different markets to position itself as a leader in digital asset and distributed ledger technology (DLT). He said: “Where we need to see a bit more movement is in a better defined regulatory environment.”

Dezert said regulation that provides more certainty for market participants will open the door to their real entry and participation in digital asset markets, along with the emergence of cash-on-chain capabilities, particularly CBDCs.

THE SHIFT TO INTEGRATION

“The timing and nature of a major disruption is not clear, but we definitely believe digital assets should build over the next few years, creating tremendous opportunities for financial innovation and new, transformed business and operating models over time,” Dezert said .

Dezert concluded that digital assets should offer many advantages and benefits over the long term, but will increase complexity in the short term as traditional and digital assets will coexist for a longer period of time. Banks and other financial intermediaries will need to manage both types of assets in parallel for an extended transition period as they move towards seamless integration.

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