Blockchain has emerged as a transformative force, promising to reshape the very foundations of capital markets. As we navigate through this era of unprecedented innovation, it becomes imperative to understand both the potential benefits and the challenges to adoption associated with digital assets and distributed ledger technology (DLT). In this article, I will attempt to shed light on the significant developments in the blockchain space and their implications for the future of finance. 

The continued adoption of DLT along distinct target goals 

We are seeing no abatement in the adoption of blockchain and the tokenization of assets within financial services, and it continues to gain traction across a range of distinct objectives. Predictions by Citi suggest a potential $4-5 trillion market cap by 2030, an 80-fold increase from the current value of real-world assets “locked” on blockchains. Euroclear and Oliver Wyman calculated that DLT could lead to substantial cost savings for the industry, reaching up to $12 billion annually. 

In securities, we see this evolving towards a model that combines the digitization of existing securities as well as a gradual adoption of digitally native securities. 

Reduction of operational costs, particularly in post-trade, streamlining trade processing, reducing settlement times, and eliminating multiple reconciliations remain the key target areas for blockchain use cases across financial services.

Similarly, use cases that focus on capital efficiency are a priority for banks, particularly in the collateral allocation and repo, as seen in J.P. Morgan’s Onyx intra-day repo settlements, processing over $950 billion on its blockchain network since its launch in 2020. 

Revenue growth remains a longer-term target aspiration with blockchain, opening up private markets to a wider buy-side via integrated models and asset transparency.

Challenges on the path to adoption

One of the primary challenges on the broader path to institutional adoption of digital assets is the tokenization of real-world assets, which involves converting rights to an asset into a digital token on a blockchain. This process requires clear legal frameworks to ensure that digital representations are legally enforceable. 

Such legal clarity has been in place in Switzerland for many years as the existing intermediated securities laws lend themselves very well to supporting ledger-based securities. 

Securities are heavily regulated, and any digital asset representing a security must comply with existing securities laws, including registration, disclosure, and compliance requirements. Navigating these regulations in the context of innovative technology is complex. 

Moreover, in traditional finance, securities transactions often involve intermediaries that manage counterparty and settlement risks. In a blockchain-based system, these risks might be managed differently, raising questions about how to ensure transaction finality and mitigate counterparty risk. 

There is also substantial effort involved in integration with traditional systems which remains a significant hurdle to solve. 

I would also highlight challenges represented by cybersecurity and fraud prevention: digital assets, by their nature, can be susceptible to different cybersecurity risks to that of traditional assets. Ensuring robust security measures to prevent hacking, fraud, and unauthorized access is a major concern for institutions dealing with digital assets that are either linked to or are themselves real-world securities. 

Finally, there is still an absence of accepted universal standards and agreed definitions and terminology.

The role of Financial Market Infrastructures (FMIs)

Financial Market Infrastructures, like SDX (SIX Digital Exchange, part of SIX Group), play a significant role in evolving blockchain-based capital markets. Contrary to the assertion that FMIs are considered mere intermediaries, whose position was a “necessary evil” brought about by limitations of pre-blockchain technology and now made redundant, FMIs are, in fact, vital to the adoption and scaling of blockchain-based services. This holds true especially in the context of regulated services. 

FMIs are uniquely positioned to perform the role of neutral third parties that provide a legal foundation to the blockchain-based financial markets infrastructure of the future, facilitating its arrangement through sound governance. As the industry moves towards decentralized blockchain-based capital markets, FMIs are well suited to manage service and asset smart contracts' governance, identification and permissioning of AML/ KYC’s counterparties, bridging traditional with tokenized markets. 

Let us not forget that traditional market structures will not disappear overnight. The adoption of new blockchain-based operating models will be severely constrained without effective bridges built between new blockchain-based models and traditional infrastructure. FMIs, as neutral parties, are uniquely positioned to provide such bridges. We can also expect FMIs, for the benefit of issuers and investors, to play a critical role in bringing together bank issued tokens. FMIs can ensure neutral and fair access to liquidity that may otherwise remain locked on the separate bank tokenization islands now deployed by individual banks. 

By partnering together, FMIs and banks will also be able to integrate these assets into their offering, providing user-friendly options (e.g., wallet abstraction solutions) to less tech-savvy individual customers and corporates, facilitating the adoption of this technology. 

The missing piece: tokenized Central Bank money (wCBDC)

To enable the scalability of blockchain-based capital market infrastructure, we advocate for the inclusion of tokenized central bank money. Stablecoins and tokenized deposits are insufficient for genuine riskless settlement. 

For instance, on December 1, 2023, digital bond issuances by the Cantons of Basel-City and Zurich settled using real CHF wholesale central bank digital currency (wCBDC) issued by the Swiss National Bank (SNB) on SDX. It is the first time the SNB has issued real wCBDC in Swiss francs on a financial market infrastructure based on distributed ledger technology.

As we embark on the next chapter of financial evolution, the industry's commitment to building a sound, safe, scalable, and sensible capital markets infrastructure based on blockchain technology becomes apparent. The journey ahead promises challenges, but it also holds the prospect of reshaping the financial landscape as we know it.