CSD Opportunities Amid an Expanding Digital Asset Landscape

The interest in digital assets continues to grow; volumes and inflows to cryptocurrencies are rising, and more types of assets are being digitalized each day. Distributed ledger technology (DLT) managed assets -- ranging from cryptocurrencies and non-fungible tokens (NFTs) to asset-backed tokens, commodities, stablecoins and more -- have found their way into the arms and portfolios of many retail investors over the past 18-24 months. Today, many Decentralized Finance (DeFi) and Centralized (CeFi) organizations are eyeing expansion into the institutional realm as a key component of their growth strategy, while investors and traditional capital market participants are finding ways to integrate new asset classes into their portfolios. Any organization that wants a piece of the institutional pie must prove it can meet the heightened requirements and due diligence inquiries of their investor, client, and member bases with ample technology, controls and processes to protect investments. How can proven, trusted central securities depositories (CSD) capitalize on the environment?  

CSDs play a mission-critical role in capital markets infrastructure by providing registry, safekeeping, settlement, and asset servicing, such as corporate action processing, for financial instruments. They have historically managed traditional financial assets, such as equities and debt securities, but with the growing adoption of digital assets trading, there are several opportunities for CSDs to expand their position and scope by facilitating efficient integration of digital assets into their existing portfolios. CSDs’ unique position as regulated entities operating with known rulebooks, market practices, and participant structures, as well as established market connectivity, can provide a solid foundation for CSDs to capture mindshare in the digital assets space while supporting changing client needs, increasing wallet share and enhancing trust and governance within the overall ecosystem.

Opportunity Ahead: DLT-powered Digital Assets Regime 

While DLT infrastructure has been considered and discussed for a variety of use cases in the post-trade environment for many years, digital assets growth and maturity are accelerating real DLT opportunities for CSDs with investors and capital markets participants seeking exposure to new digital assets while also delivering a number of benefits within the CSD organization.

CSDs moving into digital assets have significant opportunities to differentiate, create new revenue streams, service more of their clients’ needs, and increase stickiness and wallet share as a result. Whether expanding issuance and settlement services to extend access to new assets or enabling cross-servicing services to allow separate asset and liquidity pools to interact and settle across each other for improved liquidity accessibility, CSDs can help reduce friction for the clients to move into digital assets. They can also move into digital assets in an efficient, trusted and regulated environment that clients can approach with confidence and peace of mind.

With digital assets managed on DLT infrastructure, CSDs can also capture notable operational benefits through the technology. They can reduce reconciliation costs via immediate or ‘atomic’ settlement with more automation, fewer infrastructure needs and decreased complexity. They can also reduce transactional and business risk in cutting down manual processes, shorten time-to-settlement and implement full audit trail capabilities. Additionally, CSDs can increase interoperability between parties interacting on DLT or associated networks, and contribute to the improvement of provenance, participation, reliability, and trust in the entire ecosystem of issuers, investors and other participants by implementing smart contract-based workflows.

Investor Opportunity Creation

By leveraging established CSDs for digital assets issuance and settlement services, investors can be given access to these new types of assets residing on DLT in an efficient manner with a consolidated view – all within the infrastructure they already trust. Additionally, with the efficiencies offered through DLT, capital markets can become more accessible, enabling increased participation amongst a broader set of investors.

Market Participant Digital Asset Strategy Enabler

As capital market participants grow interested in digital assets, they can greatly benefit from consuming digital assets services via their existing CSD relationships. The ability to onboard and manage digital assets side-by-side with existing portfolios provides participants with a consolidated portfolio view and harmonized workflow across all asset classes (traditional and digital assets), improved traceability and auditability, alongside reduced cost and complexity. Aside from these benefits, participants accessing services across multiple assets could be enabled to cross-service to settle digital assets legs against cash or other liquid assets, improving liquidity accessibility in the digital asset settlement process under a single regulated rulebook.

Digital Currency/CBDC Facilitator

With the growth of cryptocurrencies and stablecoins, several central banks are considering issuing their own digital currencies, which creates another CSD development opportunity in Central Bank Digital Currencies (CBDCs). CBCDs could both modernize government-backed currencies and enable more efficient payments and monetary policy actions, as well as integrate DLT networks, leveraging cryptographic techniques and smart contracts to be built into the workflow. CSDs could prove to be a key facilitator for CBDCs, incorporating them into the settlement and corporate action processing.

A Road-tested, Trusted Part of the Increasingly Digital Landscape 

Trust, safety and security are critical to achieving institutionalization in digital assets, and firms in the DeFi, CeFi and traditional capital markets must prove themselves to capture investor dollars. The digital assets space has seen sizable cyberattacks over recent years, particularly in the decentralized finance (DeFi) space, with reports indicating that hackers stole more than $4 billion worth of crypto assets last year. Additionally, the prior lack of regulation has bred instances of nefarious activity. While the landscape is changing now, there is a massive opportunity for CSDs to leverage their trusted position to alleviate discomfort, decrease risk from a number of angles and improve trust across the settlement and asset servicing cycle.

In conclusion, CSDs hold a strong position with market participants and regulators, with trust and infrastructure built up over decades, and could potentially leverage their regulatory approvals into the DLT-based ecosystem. They have a unique opportunity to help banks and their clients get access and tap into the digital assets space through established access points (UIs and APIs). By incorporating a technology infrastructure that allows for the handling of both traditional financial assets as well as new digital assets, all on the same platform, CSDs can create efficient and harmonized workflows for their participants and capitalize on a timely differentiation opportunity while supporting the expanding digital asset landscape.  

Read more about how market infrastructure operator CIOs and tech leaders are exploring the digital assets space in the Celent CIO study.

Other Topics

Cryptocurrencies

Johan Toll

Nasdaq

Johan Toll is Vice President, Digital Assets and Market Platforms Strategy at Nasdaq.

Read Johan's Bio

Andreas Lundell

Nasdaq

Andreas Lundell serves as the Head of Product for CSD Technology within Nasdaq's Marketplace Technology business. He is responsible for the development of Nasdaq's CSD solutions, including the offering's functional and technical roadmaps, business development and client engagements, as well as strategic initiatives to futureproof and innovate Nasdaq's offering for the CSD community.

Read Andreas' Bio